Following Euroclear’s announcement of its “Collateral Highway,” the Battle Royale is on between Euroclear’s model, Clearstream’s model and what the banks have to offer for collateral management services. Everyone agrees that collateral needs to be optimized globally and that one pool of collateral beats multiple pools. The next question is who runs the infrastructure. This article breaks down the big players, their perspectives and their prospects.
Euroclear’s model is built around one hub that anyone globally can join but where the collateral resides at Euroclear. According to the press release, “Euroclear’s “Collateral Highway” will have multiple collateral entry and exit points. The entry points are where collateral will be sourced from all Euroclear central securities depositories (CSDs), agent banks (BNP Paribas Securities Services is the first to join), clearers and CSDs located in any time zone (the CMU unit of the Hong Kong Monetary Authority is the first to join). The securities will then be transported to where they are needed as collateral. The “Collateral Highway” is open to all CCPs, CSDs, central banks, global and local custodians, investment and commercial banks. Custodians, agent banks and CSDs without a collateral management service offering will be able to use the “Collateral Highway” as their own for their domestic clients.” Euroclear is the central and sole service provider for collateral management in this model; others are clients who in turn may be serving a domestic or distinct market segment of their own.
Clearstream’s model is built on partnering with local Central Securities Depositories to form joint ventures for collateral management. As we wrote in our May 2012 survey on CSDs and collateral management, “Clearstream’s collateral management services and its Liquidity GO product were noted as both a competitor and a partner by many CSDs worldwide. The basic idea of Liquidity GO is for Clearstream to provide all technology and operations required for collateral management in a joint venture with a domestic CSD and for assets to be held locally. In Europe, CSDs unaffiliated with Clearstream saw Liquidity GO as a threat, while others spoke of it approvingly and hoped to launch a joint platform shortly.” (In late May 2012 Clearstream signed an MOU with Iberclear of Spain for a collateral management JV.) “Outside of Europe, Clearstream was viewed only as a potential partner that could be compared to a technology company although the Liquidity GO offering holds a unique spot in the CSD landscape. On the other hand, Euroclear, Europe’s other major ICSD, was viewed as a common threat only.” Ultimately the idea of Liquidity GO is to have one liquidity pool, much like Euroclear’s Collateral Highway.
It is fair to note we took some heat from a couple of custodians on this May 2012 report. We recounted what the CSDs told us and custodians saw things some different ways. The most noticeable difference was how quietly and cleanly the CSDs themselves function. The CSDs said that they were running so well as to generally not be noticeable. Some of the custodians disagreed, feeling that CSDs were expensive and didn’t always run that well anyhow. Our note on Euroclear as a common threat also bears qualification – this is what the CSDs we spoke with told us, but the Euroclear press release notes that the CMU unit of the Hong Kong Monetary Authority in on the Highway.
The banks’ model is built on their own infrastructure. They have the same view as Euroclear – they are the sole service provider and are looking for clients, not jv partners. The only banks that will actively use Euroclear are those that have not yet built out their collateral management infrastructures. Big banks probably wouldn’t need Euroclear otherwise, as they too are connected to CCPs and bilateral counterparties worldwide. Clearstream is a natural competitor to the banks; Clearstream wants the collateral management business for its JVs in places like Brazil where the banks already operate.
The prospects for each of these major, global collateral management models will vary by country, but all the players are all likely to get a fair share. European banks especially without their own infrastructures may look first to Euroclear as a neutral ally. CSDs are less likely to flock to the Euroclear banner. CSDs particularly outside of Europe may turn first to Clearstream for the JV and revenue share that the Liquidity GO arrangement will provide. End-user clients are most likely to call their big custodian bank for help and the big custodians don’t need or want Euroclear or Clearstream (unless the ICSDs brought in collateral to the banks). The landscape is still changing though, so all bets are off until the first big victories begin to show up.