The open road
Olivier Grimonpont, Global Head of Collateral Management and Securities Financing, outlines recent enhancements to Euroclear’s Collateral Highway and related services, then maps out the future direction of travel.
The interplay between regulatory, commercial and technological shifts in the global securities markets pose very specific challenges across different regions, entities or business units. But a number of core concerns are more or less constant. In short, the current levels of cost and complexity involved in moving financial assets between counterparties is unsustainable in a world of increased collateralisation. If not tackled, they will weigh ever heavier on the shoulders of issuers, investors and intermediaries until market activity grinds to a halt.
Euroclear has designed the Collateral Highway to help firms mobilise assets cost effectively. Since launch two years ago, it has become an expanding ecosystem, connecting major banks, broker/dealers, custodians, central counterparties (CCPs), central securities depositories (CSDs), central banks and others. For a concept that becomes more compelling with size, it is significant that peak daily collateral outstanding recently surpassed €1 trillion.
Industry-wide, there is a growing consensus that the evolving regulatory environment calls for market infrastructures to enable easier access to liquidity and accelerate cross-border mobilisation of collateral. In place of silos and separation, openness and collaboration are the founding principles that will continue to guide the Collateral Highway: the more collateral takers, the more liquidity providers, the more cash investors, the more securities lenders, the more CCPs, CSDs and central banks, on the Highway, the better for everyone.
To extend our highway analogy, Euroclear’s priorities for the future are to grow the number of entry and exit points, thereby facilitating the growth of traffic, or transaction volumes, while at the same time improving access to fuel and providing greater visibility on the road and the conditions ahead.
How far have we travelled already? In terms of the markets from which the highway can be accessed, the UK has now joined and the US will connect in Q2 2016, courtesy of Euroclear’s GlobalCollateral joint venture with the DTCC. In terms of banking partners, Standard Chartered has followed BNP Paribas and Citi in joining Open Inventory Sourcing, which enables collateral givers that hold securities outside Euroclear, for example on the books of a third-party agent, to mobilise them seamlessly on the Collateral Highway and receive them back automatically whenever needed. With every new CSD or custodian connecting to the Highway, a higher proportion of total inventory can be utilised more effectively.
Just as important to the effectiveness of the Collateral Highway is the continual increase in the number and range of exit points, i.e. the services and connections users can leverage to deliver collateral to access liquidity or cover margin calls for example. Euroclear has focused, first, on providing access to more sources of central bank and commercial bank liquidity, and, second, delivering more efficient ways to optimise pools of collateral across exposure types, counterparts and assets classes.
In response to the increased need for secured funding, we have launched and will continue to develop EuroGC+ with partners LCH.Clearnet and Banque de France as an increasingly liquid market for cleared repo and other money market transactions. In parallel, we have worked with the central banks of France, Belgium and the Netherlands to ensure reforms to the euro-zone Correspondent Central Banking Model can be exploited to increase access to central bank credit.
To help market participants deploy collateral effectively, market infrastructure operators must develop solutions to overcome traditional barriers. For example, Euroclear’s RepoAccess helps to bring corporates and other cash takers into the secured financing community, by removing legal and administrative overheads which have hitherto staunched the flow of liquidity. In combination with Euroclear’s tri-party agent services, a standardised GMRA removes much of the operational obligations of the repo market, but leaves clients in full control of their choice of counterparty. RepoAccess has been warmly received by ICMA as, ultimately, it connects additional pools of assets to the repo market, thereby boosting liquidity.
While RepoAccess helps new participants bring liquidity to the repo market, it is just as important to improve access to existing pools of liquidity, thereby ensuring the supply of fuel on the Collateral Highway. Through GCAccess, borrowers can access Euroclear’s €1.5 trillion pool of securities on a collateralised, automated basis – via tri-party agreements if preferred – while lenders can generate extra revenues. And at a time when we must all break out of our silos, Euroclear has also expanded its equities finance capabilities to cover multiple transaction types in more than 30 markets.
A more densely populated Collateral Highway is to be welcomed but, in order to ensure continued and fluid mobility of collateral, we must continue to expand its capacity to avoid bottlenecks and jams. To this end, Euroclear is undertaking a key architecture upgrade. From January 2016, our AutoSelect collateral allocation and monitoring engine will accelerate towards providing a real-time processing solution.
But higher speeds and greater volumes also require higher levels of visibility and control by market participants to make optimal use of collateral. Self-evidently, there are limits to the extent a service provider can support a firm’s investment and/or trading strategies. For this reason, Euroclear’s collateral management services let clients stay in control. Through our allocation, rollover, and portfolio optimisation options, we provide a centralised source of management, information, analysis and opportunity – for example to substitute an incoming asset via an automated swap – on which the client can chose to act or not. To further support effective navigation of the Collateral Highway, we have designed a web-based dashboard - EasyWay - which enhances users’ ability to monitor collateral resources and transactions, and will soon include both a contract management and simulations module.
Are we there yet?
Euroclear is changing in many ways, but bigger is the move to openness and interoperability that all securities market service providers must embrace in response to changing circumstances. The new world may not be complete for another five years. But in a cost-constrained environment, it’s already clear that, scale, efficiency, standardisation and automation are key. Whatever your specific challenges, inertia is not an option. Wherever you’re assets are and wherever you want them to be, Euroclear will be an enabler, not a barrier.
Our first priority remains to listen to clients and use feedback to improve existing services and develop new solutions. We will continue to count on client support as we travel further along the open road.