DTCC has made clear its intention to participate in the collateral management business, first with the announcement of the Margin Transit Utility and a partnership with Euroclear, then the 100% acquisition of OMGEO, and now a white paper on collateral mobilization. The big question now is, what happens next?
First, some facts:
– In May 2013 DTCC announces a Joint Collateral Service with Euroclear including development of a Margin Transit Utility. While this was indeed news, so far it may just be scareware. Our industry sources say that the Margin Transit Utility isn’t close to being a topic of regular conversation yet and we haven’t seen much operationally in the way of Euroclear and DTCC working together. Still, if things get heated up, the DTCC-Euroclear corridor could be a major through-point for collateral movements.
– In October 2013 DTCC purchased the remaining 50% it didn’t own of OMGEO, which itself in 2008 bought Allustra and renamed it OMGEO ProtoColl. Now DTCC fully owns one of the bigger collateral management service providers in the market with a reach to over 6,500 end-user clients globally.
– DTCC of course is also a major global trade repository, runs the GCF repo facility, etc.
The newly released DTCC white paper, “Trends, Risks and Opportunities in Collateral Management,” is both interesting and not at the same time. There are many platitudes here, for example “A number of drivers are expected to dramatically increase margin call activity in the near future, and this will likely have a significant impact on liquidity and risk.” Stale data are all over the place. In this regard, it seems that the authors wanted to signal their adherence to the party line, whatever that might be, and not get anyone too excited with a controversial call.
The part worth reading comes at the very end: “Firms are growing wary of fragmented approaches that may deliver limited operational cost and risk benefits. The reality is that collateral challenges will be far more extensive than what has been reported thus far, and in many cases, fragmented solutions will only address certain parts of the problem…. it is essential that strategic collaborative solutions are employed to the greatest extent possible.”
This is the kicker: DTCC is calling for an industrywide coalition across service providers, not isolated collateral pools, in order to solve global collateral supply and demand requirements. Is this a major change? In some ways no: as even the DTCC’s own linkup with Euroclear already shows, major Central Securities Depositories and collateral managers are already looking at how to work together on interoperability of collateral. On the other hand, DTCC may serve as the central meeting point for not only Euroclear, but also Clearstream, BNY Mellon and J.P. Morgan. We think this is the next logical step: DTCC could be the glue that brings the various competitive market participants together in one global collateral pool.
DTCC has announced their intention to be a player in the collateral management space. Now let’s see what they do with it.