Implementation of global financial regulations is profoundly impacting flows of liquidity and collateral worldwide. Regulatory requirements, combined with increased interconnectedness between market segments and players, have made collateral processing significantly more complex. This is an industry challenge that requires an industry response. The industry needs an open infrastructure that will enable the market ecosystem to adapt to the operational challenges brought about by the changing capital markets. DTCC-Euroclear GlobalCollateral Ltd is the industry’s response.
On September 30, 2014 Euroclear and DTCC announced the establishment of DTCC Euroclear GlobalCollateral Limited (“GlobalCollateral Ltd.”); a 50/50 joint venture with the goal of streamlining collateral processing worldwide, and helping to improve the stability and soundness of the financial markets. GlobalCollateral Ltd. will deliver a global straight-through margin and collateral processing utility as well as enable participants to automate their collateral management tasks, securities financing transactions and margin delivery on a global basis. GlobalCollateral Ltd. will offer derivatives and financing solutions, powered by two key services: the Margin Transit Utility (MTU) and the Collateral Management Utility (CMU).
The MTU will provide straight-through processing of agreed margin calls thereby mitigating systemic risk and providing improved operational and liquidity management. The CMU will enable market participants to automate their collateral management tasks, including the seamless re-positioning of inventories across settlement locations thereby making collateral available wherever and whenever it is needed to satisfy any type of obligation.
This is the first of a two part series intended to introduce the industry to these two services.
Margin Transit Utility
The wave of financial reforms affecting derivatives markets is driving up margin call volumes. It is estimated that in the next few years, margin call activity may rise as much as ten-fold due to the global regulations addressing margin for non-cleared derivatives as well as the implementation of mandatory clearing.* This increase in collateral call volume will no doubt strain existing processing infrastructures. Although many firms have upgraded their own systems, others are not so well prepared. With a significant increase in the interconnectedness between market segments and participants, there is a need for an industry based solution. Through automation, the Margin Transit Utility (MTU) will help the industry to rise to its operational challenge.
As part of the GlobalCollateral Ltd. joint venture, the MTU is a core component of a developing industry infrastructure. A comprehensive, straight-through solution for streamlining the processing and settlement of margin and collateral, it will help market participants ensure that settlement instructions are captured accurately and automatically enriched with the appropriate information,, custodians and dealers notified to settle, and settlement status displayed to the users. The automating of these process will step up processing velocity, improve visibility, reduce uncertainty, and facilitate liquidity and risk reporting.
The MTU is being built to benefit a wide range of market participants – whether they are broker-dealers, custodians, outsourcing providers / administrators, or investment managers. It will standardize the margin settlement process for OTC derivative transactions, cleared or non-cleared, as well as for any other marginable product. In particular, the MTU will deliver the following benefits:
- Continuously updated settlement statuses on all collateral movements
- Gain a single global view of settled collateral balances
- Ensure accurate and timely consolidated reporting
- Reduce operations and systems costs through standard processing and scalability
- Enhance operational efficiency from automated and reliable straight-through processes
- Limit counterparty risk by introducing STP, reducing failed trades and reconciliation challenges
- Improve liquidity risk management through near real-time settlement information
- Minimize operational risk through electronic automation replacing manual processes such as faxes and emails
The MTU will offer these benefits by providing STP automation from the agreement of the margin call through to settlement, through four core services:
- Collateral instruction enrichment: Following receipt of an agreed margin call, the MTU will enrich the message to include the appropriate standing settlement instruction by leveraging the enhanced Omgeo Alert SSI database.
- Collateral settlement: After enrichment, the service will initiate a cash or securities settlement message to the appropriate market participants for settlement and recordkeeping. These include: custodians, internal settlement teams, administrators, asset managers and broker-dealer operations. This message triggers a transfer of cash or securities from a collateral account. The custodian, paying agent or broker-dealer will then send an ISO-based message back to the MTU stating that the trade has been settled.
- Segregated collateral release messaging: In an environment where the amount of collateral that is segregated at a third party custodian is expected to grow significantly the release of collateral back to the owner will be streamlined by automation of the release approval message from the collateral holder to the custodian. This will allow the custodian to release the collateral back to the counterparty without requiring a manually faxed release instruction.
- Collateral reporting and record-keeping: Consolidated reporting and record-keeping will link settlement activity to margin activity. This high level of transparency allows the industry to establish processing benchmarks and standards, to confirm securities and cash balances on an intra-day basis, as well as to maintain a central reconcilable reference for record-keeping. Furthermore, collateral management can be significantly improved, notably in times of market stress.
An important aspect of the MTU is that it will instruct settlement for a wide range of collateral a firm may deem eligible. The MTU will accept matched margin calls and instruct settlement for USD, AUD, BGN, CAD, CHF, CZK, DKK, EUR, GBP, HKD, HRK, HUF, ISK, JPY, LTL, MAD, NOK, NZD, PLN, RON, RSD, SEK, SGD, TRY, ZAR as well as US and Global Securities; and essentially most any fixed income and equity instrument for which a swift message can be used to instruct movement.
The launch of the MTU, providing connectivity to AcadiaSoft, validation, SSI enrichment, Alert functionality, settlement messaging, margin call and substitution messaging, tri-party control account (i.e. segregated collateral) release messaging and GUI Portal and reporting, will be ready for client testing early in 2016 in advance of the global implementation of non-cleared margin rules. The design of theMTU is based on input from industry firms, who expressed common concerns about collateral management processes, including the need for a scalable industry processing solution in the face of industry reforms.
DTCC-Euroclear GlobalCollateral Ltd is hosting the Collateral Conference for the Americas on 16 September 2015. To find out more about this conference and request an invitation, please click here.
*DTCC’s “Trends, Risks and Opportunities in Collateral Management” white paper, January 2014. (The launch of MTU services by DTCC Euroclear GlobalCollateral Limited is subject to regulatory approval.)
Ted Leveroni is the Chief Commercial Officer of DTCC-Euroclear GlobalCollateral Ltd.