by Brigitte Daurelle, Chief Executive Officer of the ESES CSDs, Euroclear
Identifying and tackling new risks in the system
Are new risks lurking in the financial undergrowth? On the face of it, everything looks rosy, with global growth slated to be 3.9% this year, according to the IMF. But are we in danger of getting complacent?
This, in essence, was the question I and others debated on a EuroPlace panel recently. The focus was on the French market, but many of the issues were globally relevant.
The starting point is this: the overhang of the financial crisis is still with us. Some of the risks with which we grappled then are still poorly understood. And the actions taken to deal with them have in some instances opened up new vulnerabilities.
So where should we be focusing our attention?
I see three key issues – liquidity, technology and sustainability. Let me outline my thoughts on liquidity below.
Ever since the crisis, banks have been deleveraging and contracting. They have had to make difficult decisions about how they deploy their capital.
Much tougher capital adequacy requirements under the Basel III regime – and in particular the liquidity coverage ratio – have forced them to tie up more assets on their balance sheet.
The result has been deleveraging, lower trading activity and smaller ticket sizes – all of which have compounded the liquidity challenge.
At the same time, European and US initiatives aimed at de-risking over-the-counter (OTC) derivatives markets have forced them to clear these securities through central counterparties (CCPs).
That has sent demand for quality collateral through the roof as CCPs seek to take in only the best assets as collateral.
This safety-first approach on the part of regulators has added to the pressure both to access secure funding and make assets work 24/7.
How to tackle this challenge? Clearly, a firm’s entire asset portfolio – spanning bonds, equities and cash – must be made to work optimally and in harmony.
The problem is that these assets are usually dispersed around different trading desks and in different parts of the world. To deal with that, firms need an enterprise-wide view over all the assets they have at their disposal. There is now a premium on inventory mobility.
And that in turn requires a central and open infrastructure that overcomes some of the operational hurdles that restrict access to collateral.
One particular issue sell-side firms have historically faced is how to make non-liquid US assets available for financing transactions with global counterparties.
Now, through a highly automated linkage between Euroclear and America’s DTC, USD denominated assets held within DTC can flow back and forth to Euroclear’s tri-party platform in near real time.
In France, we at Euroclear are helping to maximise collateral mobility by developing a new model that uses the Elixium marketplace.
Elixium is a global, all-to-all secured financing and collateral exchange designed to address the balance sheet pressures mentioned above. For now, this collateral optimisation model is unique to the French marketplace and in already in use with Banque de France and BNP Paribas.
As industry leaders, identifying and managing the signs of strain in the system is all-important in heading off potential risks.
We at Euroclear are actively engaged in building robust solutions that both prevent systemic risk and reduce some of the challenges our clients face.
Going forward, I believe this will play a big role in sustaining trust in our marketplace through a time of accelerating change.
As Chief Executive Officer of ESES (Euroclear France, Euroclear Belgium, and Euroclear Nederland), Brigitte is a key member of Europe's financial markets. She is Vice-Chair of the European Central Securities Depositories Association (ECSDA) and a Board and Audit Committee member of both Euroclear Finland and Euroclear Sweden.