UBS and HSBC repo trade shows importance of collateral optimization

A press release from Euroclear yesterday showed how collateral can be optimized in a repo transaction between UBS and HSBC for RMB. In the trade, UBS’s London account moved assets from Euroclear Bank to the Hong Kong Monetary Authority as part of Euroclear’s new Collateral Highway. We recommend a close read of the press release, below, as this seems to us like a sign of future things to come. There are also some interesting data points about the use of RMB as a currency for global bank funding activities.

UBS AG London and HSBC, Hong Kong branch have conducted their first ever renminbi (RMB) triparty repo using Euroclear Bank and the Hong Kong Monetary Authority (HKMA) as collateral management agents. The bilateral agreement in place between the HKMA and Euroclear Bank has enabled the transfer of securities as collateral from UBS AG London’s account in Euroclear Bank, via Euroclear’s global ‘collateral highway’, to the HSBC Hong Kong branch’s account in HKMA to support the RMB repo.

The ability for international financial institutions to use securities held with Euroclear Bank as collateral in triparty repo transactions with members of the HKMA, to access liquidity from Hong Kong in renminbi, Hong Kong dollars and other currencies, is precisely why this joint service was initiated.

“HSBC estimates that by the end of 2015, the level of RMB deposits in Hong Kong will increase to a total of 30% from the current 9% of all Hong Kong deposits. Firms that manage these growing RMB reserves will naturally seek to optimise their cash balances through the repo markets with an international counterparty base. It was easy and efficient to finalise the repo with UBS AG London, working through our local CSD account, operated by the HKMA,” says Justin Chan, deputy head of global markets Asia Pacific and Head of Hong Kong Trading, at HSBC.

“This inaugural transaction represents a significant advance in liquidity and collateral management in Hong Kong. It is operationally efficient and further integrates collateralised lending and borrowing between the domestic market in Hong Kong and the international market,” says Bernard Chin, executive director, emerging market APAC repo trading, at UBS.

The HKMA reports that RMB cross-border settlement expanded fourfold from RMB 50 billion in August 2010 to almost RMB 200bn in October 2012. There are further signs that these strong growth rates will continue over the long term. Leading global investment houses, like HSBC and UBS, are likely to increase use of the RMB for funding purposes.

“The HKMA and Euroclear Bank are pleased to serve the needs of domestic and international market participants in managing their collateral for RMB and other types of repo and securities lending deals. Working successfully with HSBC and UBS to fulfil their collateral management requirements proves that – together – we can source and maintain collateral from Hong Kong, London or almost anywhere else to sustain vital liquidity channels,” says Olivier Grimonpont, general manager and regional head, Asia-Pacific, at Euroclear.

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