Clearstream held its annual GSF summit in Luxembourg on January 22nd and 23rd. The Summit encompasses repo, securities lending, collateral management and various aspects of custody and settlements. It is this broad cross section of the financial services industry that gives value to this annual gathering.
As (almost) annual attendees of this conference, we noted a slightly different tone to a number of the panel discussions. For the past several years speakers and panelists have devoted considerable time to speculating on the exact nature of proposed regulation and the dramatic negative impact this regulation was going to have on the secured finance markets. The need for a significant increase in the pool of high quality liquid collateral required to support the central clearing of derivatives trades and the challenge transforming non-liquid collateral in to liquid collateral were common themes over the last several years. This year’s conference appeared to be slightly more upbeat. This may be a function of fact that the new regulatory environment is finally taking shape and that some of the more draconian aspects of market reform seem to have been abandoned or it may simply be the case that market participants are beginning to see that it is possible to navigate these structural changes and continue to perform the traditional functions of securities finance, securities lending and collateral management albeit in a slightly more complicated environment.
The market observers’ panel included a brief presentation of the ERC’s latest repo survey by Richard Comotto. Richard noted a contraction in the market from EUR 6,079 billion to EUR 5,499 billion. This contraction of the market was confirmed by a further analysis which maintained a constant sample and showed an 8.2% decrease. It was suggested that this decrease could have been influenced by several factors including yearend balance sheet management, the ECB’s efforts to supply liquidity and the cumulative impact of regulation on the market. We would discount the impact of year end (the survey was conducted on the 11th of December) and ECB liquidity (earlier surveys were conducted when the ECB was supplying virtually unlimited liquidity) and suggest that various regulatory initiatives seem to be weighing on the market. This is also illustrated in the US market which fell 8.6% during the second half of 2014. Other trends of note were an uptick in CCP trading despite anecdotal evidence to the contrary and an uptick in tri-party volumes. On the whole we would interpret this as the market making adjustments to the new environment. The reduction of balance sheets coupled with a movement towards central clearing and the efficiencies offer by tri-party settlement all appear to be examples of dealers optimizing their scarce resources; personnel, and capital.
Another member of this panel, Philip Brown of Clearstream delivered a detailed presentation of the roll out T2S-Target 2 Securities. Previous years’ presentations have been all about time lines and cost. With T2S scheduled to go live in 2015 the market will see a dramatic reduction in the cost of cross boarder settlement and the collateral required to support securities clearing, the opportunity to consolidate numerous systems and hopefully a greater level of competition in the area of post trade services.
The dealers’ panel continued with the themes of allocating scarce balance sheet and capital and searching for efficiencies where ever possible. Shortly before this year’s Summit the Basel Committee backed away from its proposal to disallow repo netting. For obvious reasons this had been identified as one of the most detrimental regulatory proposals facing the market. This concession will in turn give a boost to CCP’s. But as the panel pointed out this is not a perfect solution. Depending upon the mismatch of assets and liabilities the margin requirements for CCP trading can be substantial. A partial solution to this dilemma may be available from LCH. They have created a tool to allow dealers to view their book of business and conduct offsetting trades to reduce margin requirements.
The lenders panel reported a significant increase in available inventory, another illustration of participants’ increasing comfort with the secured lending market but a relatively static level of borrows, a fact that we can corroborate from our 7th annual survey of institutional investors in securities lending released this month. On the revenue side, although the relative mix of GC and specials has remained constant over the past several years, the revenue attributable to ‘hot’ stocks has now reached almost 50% (source eSecLending). Looking forward, panelists noted that Basel III’s counterparty risk weightings would have a negative impact upon certain beneficial owners while advantaging others.
Finally, Clearstream introduced their new streamlined tri-party repo agreement which “enables market counterparties to sign just one contract for multiple counterparties.” The contract covers only tri-party transactions (within Clearstream) and is referred to as CRC, Clearstream Repurchase Conditions. To date 20 users have signed up and Clearstream reports another 50 expected to sign in the first half of 2014. Historically, institutions entering the tri-party market were required to work through two pieces of documentation with each counterparty; a bilateral repo contract and a collateral schedule. The value of the new Clearstream agreement is that a participant need only sign the repo agreement once to gain access to the ‘club’. This leaves only the negotiation of the collateral schedule for each counterparty he wishes to trade with.
Clearstream should be recognized for its early recognition of the interconnected nature of securities finance, settlements and collateral management and for their efforts to bring together individuals across these functions. This year’s event was attended by over 850 individuals.