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 second of a two part series intended to introduce the securities finance market to these two services.
Collateral Management Utility
The CMU will allow market participants to mobilize securities collateral for margin posting or securities finance transactions regardless of where that collateral is held or where it is required. The service will seamlessly mobilize eligible assets based upon rules supplied by users and on settlement services provided by the participating platforms; DTCC and Euroclear. The CMU will automatically allocate securities collateral for initial pledge/financing or substitution to multiple users regardless of location. All securities movements are subject to the collateral and liquidity controls of each affected settlement platform or settlement agent.
The CMU is designed to meet the needs of a broad spectrum of market participants; dealers, CCPs and custodians, the latter acting for the benefit of their underlying clients. It is intended to address the needs of both the secured funding market; repos and securities lending, as well as derivatives margining. Securities markets are faced with two structural challenges; increased regulation and a need to minimize the costs of trading and settlements. Derivative reforms including Basel III, Dodd Frank and BCBS-IOSCO; have resulted in both mandatory central clearing of a broad spectrum of the derivatives transactions and new margining rules for the remaining bilateral trades. These new collateral requirements will increase the value and frequency of collateral postings and will rely heavily upon the exchange of High Quality Liquid Assets. Globally, the largest and most broadly accepted pool of HQLAs is the US treasury market. Allocating and settling USTs in real time directly from a participant’s settlement account into his counterparty’s settlement account is the key functionality of the CMU within the derivatives market. In the financing space, the CMU capitalizes on this structure to mobilize assets over the course of the trading day therefore reducing the need for daylight credit to support securities settlements. In addition, it can seamlessly re-position DTC assets into a participant’s Euroclear account therefore allowing clients to access additional pools of cash and help manage their Liquidity Coverage Ratio and Net Stable Funding Ratio.
The CMU is based upon Euroclear’s Collateral Highway model. In fact, by adding US securities; both DTC and Fedwire, it can be viewed as the single largest on ramp to that highway. The CMU will allow participants to automate securities financing transactions and margin movements to multiple exposures regardless of securities location.
DEGCL will operate as a service company, receiving pre-agreed exposures (repos, collateral pledges or margin movements) from market participants and then seamlessly mobilizing eligible assets directly from the collateral provider’s settlement account to the receiver’s settlement account. The allocation of assets will be governed by collateral parameters pre-agreed by the parties to the trade. By operating intra-day through the core settlement structure of DTC and the Fedwire, the CMU will enable participants to settle transactions on a security by security basis over the course of the respective settlement windows thereby dramatically reducing the need for daylight credit to support financing and ensuring that margin movements occur promptly.
The CMU will maintain a central repository for securities data and securities pricing information. It will access eligibility criteria, haircuts, and concentration limits from pre-agreed collateral schedules. It will validate, value and allocate collateral and preform all necessary revaluations, recalls and substitutions across the life cycle of each transition.
In addition, the CMU will allow collateral providers to re-position DTC collateral from their DTC account to Euroclear’s DTC account whereupon Euroclear will immediately reflect those positions in the client’s pool of assets within Euroclear. This will allow dealers to access additional pools of funding for corporate bonds, asset backed securities and equities. This will benefit dealers by expanding their funding base for ‘non-liquid’ collateral and potentially accessing additional sources of long dated funding therefore allowing them to manage their LCR and NSFR.
With the signing of the joint venture agreement in September of 2014, DEGCL formed a market advisory group to assist in the structuring of the CMU. That group includes 8 dealers, 3 CCPs and 2 global custodians. With the assistance of that group, DEGCL has established a timeline for the roll out of the CMU. Phase 1 will be go live in June of 2016. It will include all key infrastructure components with the objective of supporting the pressing needs of the OTC derivatives market while bringing powerful features to add settlement efficiency to the financing segment.
With the roll out of phase 1 the CMU will:
- Deliver an open solution focusing on the implementation of the regulatory requirements of the OTC derivatives market applicable to cleared and non-cleared business using securities collateral
- Facilitate implementation of segregation/collateral control regulatory requirements
- Allow access to both DTC and Fedwire securities
- Operate agnostic of settlement location (settlement infrastructure or custodian)
- Process Securities Financing transactions on an intra-day basis
- Add new sources of financing in Euroclear Bank for DTC assets with full STP processing of the inventory re-alignment chain and financing in Euroclear Bank
- Reduce the cost of funding on a global basis
- Minimize operational changes via current tri party repo process in the US; i.e. ‘long box’ model
Phase 2, scheduled for 2017 will add automatic selection and optimization of collateral across multiple counterparties and exposures.
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.
(The launch of CMU services by DTCC Euroclear GlobalCollateral Limited is subject to regulatory approval.)
Oscar Huettner is Managing Principal of LGM Financial Consulting, on behalf of DTCC-Euroclear GlobalCollateral Ltd.