BNY Mellon and Euroclear reveal true extent of fragmentation in the collateral marketplace

Brussels/New York, November 10, 2021 — The global collateral marketplace remains highly fragmented, making it challenging for market participants to easily deliver securities to locations where they can be efficiently posted as collateral, according to a new white paper published today by BNY Mellon and Euroclear.

The paper, Bridging the Collateral Divide, shares for the first time an analysis of the collateral businesses of the world’s two largest  collateral infrastructure providers. This analysis – which was conducted by PwC in 2019 – was undertaken to broadly understand the potential for enhanced collateral usage. It examines the number of common collateral clients between the two firms, the types of securities these clients are holding as collateral assets and the financing activity this collateral is being used to support, such as repo, securities finance and OTC derivatives transactions.

The analysis sheds light on a number of issues in the collateral marketplace that have long been suspected, but not empirically verified until now. Among the standout observations:  

  • BNY Mellon and Euroclear had numerous common collateral provider clients.
  • The majority of common clients held fixed income securities under custody with both firms, with government bonds being the most common class of bond. 
  • A large proportion of clients held equities across the two firms, but stocks as collateral represent only a small portion of overall client holdings. 
  • By size, triparty repo and securities lending are the two most popular types of collateralized trade.
  • A significant portion of the common universe of assets were unencumbered, presenting an efficiency opportunity for assets to be moved between the platforms if a better view on cross-institution collateral optimization was possible, and collateral mobility was more achievable.

The high degree of overlap in asset type and trade activity highlights the challenges collateral providers experience in moving assets from where they are located under custody to where they are needed to support collateralized transactions.

“It is clear that firms value the ability  to optimize their collateral across borders and the industry needs to make it easier to mobilize assets around the globe,”  said Brian Ruane, CEO, BNY Mellon Clearance & Collateral Management. “We look forward to a discussion in our industry on how to move toward a more frictionless and standardized collateral marketplace.”

Jo Van de Velde, Head of Group Strategy and Product Expansion at Euroclear added: “We are very pleased to have produced this paper together with BNY Mellon which gives in-depth insights on measures that could be taken to break down silos and truly mobilize collateral management on a global basis. Through market intelligence and industry engagement, we can tackle the issue of collateral fragmentation in order to drive market efficiencies.”

The paper concludes by outlining a number of steps the collateral community could take to promote the mobility of securities inventory and the velocity with which collateral can be delivered to where it is most needed. These include setting a T+0 or T+1 settlement goal, synchronizing operating windows and instituting a 24-hour inventory and collateral management service model. 

Note to editors

Euroclear group is the financial industry’s trusted provider of post trade services. Euroclear provides settlement and custody of domestic and cross-border securities for bonds, equities and derivatives to investment funds. Euroclear is a proven, resilient capital market infrastructure committed to delivering risk-mitigation, automation and efficiency at scale for its global client franchise.

The Euroclear group comprises Euroclear Bank, the International CSD, as well as Euroclear Belgium, Euroclear Finland, Euroclear France, Euroclear Nederland, Euroclear Sweden and Euroclear   UK & International. The Euroclear group settled the equivalent of EUR 897 trillion in securities transactions in 2020, representing 276 million domestic and cross-border  transactions, and held EUR 35.2  trillion in assets for clients by end June 2021.

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