ICSDs viewed as key to collateral mobility
They say that necessity is the mother of invention. For broker-dealers and banks, there’s an urgent need to make far better use of high-quality liquid assets such as government bonds in the face of new regulations including EMIR, Dodd-Frank and Basel III. But they can only go so far themselves by reinventing their collateral management operations. In order to maximise efficiency, they must have innovation from ICSDs too.
The key role of ICSDs was a recurrent theme at our May Collateral Conference. Without external infrastructure improvement, collateral managers won’t be able to efficiently and quickly move collateral across the globe. Firms won’t be able to pool collateral across locations and produce a consistent view of assets stored within CSDs.
Research highlights the importance of ICSD innovation. Collateral velocity and mobility rank as the equal highest challenge to managing collateral (alongside pricing collateral assets), according to Collateral Management in Europe: Searching for Central Intelligence, a white paper prepared for Euroclear by Aite Research. Published at our conference, the paper finds market infrastructure inefficiencies, such as the inability to pool collateral across domestic CSDs and a common absence of interoperability, hamper firms’ ability to move collateral around the globe.
Consolidation & collaboration
A broker quoted in the paper believes that ICSDs and clearers will be the key to greater collateral mobility in future. The firm is planning to assess the costs of using the pan-European settlement system versus the current arrangements with its European service providers and, as part of this evaluation, bringing down the number of CSD relationships from seven or eight down to three or four over the next five years.
While CSD consolidation is widely seen as inevitable, collaboration between infrastructure providers will also change the shape of the industry. Our conference delegates cited the DTCC-Euroclear Global Collateral joint venture as an exciting development, allowing them to mobilise collateral globally for the first time, overcoming settlement period differences between countries.
Reengineering of securities infrastructure
But the concentration of collateral activity in the ICSDs and other remaining players will also concentrate risk. Marcia De Wachter, Executive Director, National Bank of Belgium, sounded a note of caution at the conference, warning that the regulators would be monitoring emerging risks.
The need to comply with regulation is driving a reengineering of securities infrastructure, with ICSDs set to play a central role. Global financial regulations are profoundly altering flows of liquidity and collateral. It’s down to ICSDs to build the scale, interoperability and security that the industry needs.