As banks, brokers and beneficial owners begin to get serious about signing on to Eurex Clearing’s Lending CCP, we evaluate what’s required to go live. We spoke with early participants and evaluated Eurex Clearing and Pirum documents on the boarding and integration phase, IT, legal and risk requirements.
Both Eurex Clearing and market participants agree that the process for the Lending CCP is unlike anything that the market has seen before. This could be good if it were easy, and in some cases it has been, but the process also requires additional attention to ensure a successful outcome. As one example, the European securities lending market is used to a 30 page GMSLA agreement between bilateral counterparties. The Eurex Clearing agreement can be substantially longer. While the sell-side knows this, the buy-side is looking at clearing agreements for the first time. This can be a shock.
The market participants we spoke with said that getting live on the Lending CCP should be a six to eight month process. Some organizations started when Eurex Clearing first announced the Lending CCP project two years ago, but the average active engagement time was in the six to eight month range.
There are three parts to the sign-on process. First is technical connectivity to Eurex Clearing for reports, monitoring of securities settlement and access to clearing functions. Second is the admission process including completion of Eurex Clearing’s forms. Third is technical connectivity to a Lending CCP Flow Provider, which at this time is either Eurex Group’s own Repo-SecLend market or Pirum’s Real Time Service.
Market participants report that the greatest issues and opportunities for concern arise in the technical connectivity to a Lending CCP Flow Provider. The Flow Provider sits in between the lender and borrower and sends validated trades to Eurex Clearing. In Pirum’s case, both lender and borrower have a near real time interface into Pirum’s platform to monitor for reconciliations and breaks if trades do not match up on both sides. Lenders and borrowers also send return instructions, receive marks to market, monthly billing, recalls, buy-ins, agree rate changes and parts of the corporate actions process through the Pirum interface.
Institutions using Pirum report that the process has been primarily straight-forward. This is not a guarantee, but Pirum’s integration with client systems simplifies the set up and go-live process substantially. Two market participants noted that without Pirum, it is possible that they could not have successfully completed the project. Market participants already live on the CCP report that once set up with Pirum, the process runs itself.
Institutions had greater difficulties with going directly, and in some cases firms were going both directly and via Pirum. Primary concerns focused on understanding the Eurex process. Going direct requires interfacing with internal project teams, and participants note that this may be difficult given different processes and procedures. Using Pirum for integration solves these problems.
There were some complaints about the forms that Eurex Clearing requires for admission. These were viewed as at times confusing and requiring additional conversations to understand exactly what Eurex Clearing was asking for.
Eurex Clearing has responded to these concerns by offering onsite client workshops to cover loan lifecycle management, corporate actions processing, risk and default management, the admission process and legal requirements. Market participants reported that Eurex Clearing’s addition of a new client service person specifically for the Lending CCP should also help new entrants. Eurex Clearing understands that the process needs to be better resourced. A dedicated client solutions approach is to be introduced; this will be the central point of contact for clients and will be responsible for coordinating the client’s on-boarding, readiness and issue resolution.
There were highly divergent responses on how steep the learning curve has been to get going. Some participants said it was very simple, just a matter of adjusting a few processes and helping departments like corporate actions, accounting or reconciliations prepare for new reports. Others said they had a very steep learning curve in preparing for entirely new ways of doing business, particularly how Eurex Clearing handles collateral management. There is no correlation to whether using Pirum or the Eurex Repo-SecLend Market as the Flow Provider was easier on the learning curve.
The chief risks reported in the go-live process were ensuring adequate information on cash settlement between Eurex Clearing and internal applications, and in managing corporate actions. In a bilateral transaction the custodian provides feedback on settlement, but this does not happen in the same way with Eurex Clearing directly. It was also noted that Eurex Clearing has some local variations in the settlement process to resolve. These are elements of the technical connectivity to the home market CSD and cannot be solved by using Pirum.
On the corporate action side, there may still be a need for education about how corporate actions are handled and their potential for impacting credit limits. A credit limit issue would apply if Eurex Clearing must implement reverse novation in order to satisfy the requirements of the corporate action. Corporate actions in general, including dividends and mark to market pricing, were noted as potential risk areas. These are rare incurrences and did not appear to be insurmountable concerns but were worth pointing out.
Market participants had three useful recommendations for getting going on the onboarding and go-live process:
- Ensure that control, technology and reconciliations teams understand what is coming in from Eurex Clearing, Pirum, and Eurex Repo-SecLend Market.
- Be aware of the many internal and external market participants involved in the go-live project.
- As a flow provider, Pirum has the best available recognized process aligned to bilaterally agreed securities lending transactions for the Lending CCP market.
The set up and go live process on Eurex Clearing’s Lending CCP is gaining ground. It is not yet mature and market participants should be aware of a potentially steep learning curve and a need to include many internal and external parties along the way. Market participants that have been through the process report that there is light at the end of the tunnel, and that the process on Pirum works remarkably well on a day to day basis. New entrants to the Lending CCP will want to consider these points in advance before engaging in the set up process.