Last week we held a panel and reception in New York City, “Clearing and Market Infrastructure for Repo, Funding and Liquidity,” co-sponsored by the Options Clearing Corporation and DTCC-Euroclear Global Collateral Ltd. A main focus of the panel was: in light of all of this new infrastructure, how does balance sheet management or operational efficiency really improve for clients? Here’s what we found out.
Netting was a core topic, and the conversation continued into the reception. We know that CCPs have a 2% risk weight for capital ratios and that netting rules apply for trades on the same products as well as margin on CCPs. How well though can trades across products be netted down for margin purposes and for balance sheet risk capital metrics? Our big takeaway was that netting rules are not set in stone; they can be changed at the discretion of accounting standards boards. This means that while currently cross-product balance sheet netting is not possible for the OCC’s clients, this could easily change in the future. A request is currently before FASB to make OCC Fin 39 and Fin 41 eligible across seclending and repo. For those interested in more on this topic, see our related post: “What we know about cross-product, risk-based netting and CCPs.”
Does the market want the best price or the comfort of a bilateral relationship. This was an area where it seemed like people had strong feelings but didn’t necessarily want to air them in public. (Maybe its time that Finadium moved to an Internet-based system where we can anonymize audience commentary.) We thought that the market was moving to wanting the best price in securities finance. Others said no, the market wants the comfort of knowing the counterparty even if that meant not getting the best rate. Later at the reception, a senior exec told us that he wants the best price no matter what. How the market trends on this matter is important. If just best price is the priority then the market might expect growth in electronic matching platforms that tie back to CCPs. If negotiated relationships are most important then the bilateral market has a long life ahead of it, even if trades are then sent to CCPs for clearing.
Our panelists thought that the growth of their market infrastructure was a net positive for the market and that no one would be threatened or disadvantaged by their new services. We aren’t so sure. As Central Securities Depositories (CSDs), CCPs and service providers offer more value-added services, that will put pressure on someone else in the value chain. This isn’t necessarily a bad thing as innovation tends to make the market more efficient. But it also means that noses will be bumped as CCPs, tri-party and CSD service providers get bigger.
The recent reserve liquidity funding announced by Options Clearing Corp with CalPERS via eSecLending was viewed as a rarity. It seems like a good idea and has regulatory support, but there are a limited number of opportunities for big cash holders like CalPERS to meet up with CCPs or other institutions that need a cash reserve in the event of a crisis. Here’s the press release on the deal.
New infrastructure for funding is still a bit of a future event – both Global Collateral Ltd and Options Clearing Corp are looking at launches in the next 12-24 months. As is well known, OCC is actively making plans to accept the buy-side as direct members in its securities lending CCP, but plans must still be submitted to regulators and approval given before anything actually happens. As an aside, we note that Tradition’s DBV-X is expecting to launch later this year.
Our great thanks to the over 95 registrants to this event and to the Options Clearing Corp and DTCC-Euroclear Global Collateral Ltd for co-sponsoring. We look forward to continued work in the repo, funding and liquidity space.