SIBOS, the 7,000-person strong global conference put on by SWIFT, is mostly about payments and transactional services, but for some time has also been discussing market infrastructure (including CCPs and CSDs). Collateral management shows up on the sidelines; securities lending and repo are rarely present. But we caught one panel in particular yesterday that was quite interesting on the future of market infrastructure. We present below our summary of key points and some feedback of our own.
The panel, “Market infrastructure crystal ball: what the future might bring and how to get ready for it?, was held on September 30th at the end of the conference day. The panelists were:
Hester Peirce, Mercatus Center, George Mason University
Daniela Peterhoff, Partner, Oliver Wyman
Philip Brown, Member of the Executive Board, Clearstream Banking
Richard Dzina, Senior Vice President and Wholesale Product Office Manager, Federal Reserve Bank of New York
Thomas Zeeb, Chief Executive Officer, SIX Securities Services
Tom Zschach, Chief Information Officer, CLS
Dr. Peirce kicked off with three round up points and predictions from the regulatory perspective:
1) Clearing doesn’t solve risk, it just moves it around (this has been a big theme for Finadium too).
2) There is the potential of a trade war if regulators don’t start working together. She expects that international coordination will continue to be a problem.
3) Regulators have not recognized that the cost of regulation extends beyond explicit costs and is now in the realm of lost innovation due to focus on regulation matters. She expects that this lost innovation will continue, and includes a loss of organic opportunities for market participants to work together.
Thomas Zeeb of SIX noted that there is no overview of global regulations and how they may be cross-impacting each other. We wonder if this would be a good Finadium research report and welcome reader feedback on this topic. He also had a point about reduced settlement cycles yielding more assets for collateral mobilization. Reducing settlement cycles is technically easy but exchanges operational risk for credit risk. Phillip Brown of Clearstream said that market infrastructures could do same day settlement but don’t want to.
Mr. Brown also pointed out an increasing use of non-cash collateral that will emerge as interest rates rise and cash is no longer free. We at Finadium are paying close attention to this point as well.
Here’s where things got interesting. Both Mr. Zeeb and Mr. Brown took a shot at the DTCC/Euroclear model of collateral management without saying “Euroclear”. Mr. Brown noted that there were two ways to look at collateral organization. First, there is interoperability between collateral pools, where collateral is in effect pledged to other parties but the collateral itself stays in the home jurisdiction. All members of an interoperable platform would use a common or connected technology. Regulators like this model, Mr. Brown said, because they themselves have greater control. This model is the Liquidity Alliance. Mr. Zeeb also supports this, saying that interoperability is better for risk diversification and that competition pushes market infrastructures to improve.
The second model is a move to a single collateral pool where assets leave the home jurisdiction and reside in one global platform. This increases centralization and operational risk in case of a problem with the single pool. This is the Euroclear model. Unfortunately no Euroclear representatives were on the panel to offer a rebuttal.
Is this just sour grapes from CSDs that are frustrated at Euroclear’s momentum is signing agreements at SIBOS (Euroclear held deal signing ceremonies with DTCC, LME Clear and even SIX over the last couple of days)? Or is it a legitimate point that a single collateral model increases risk, and interoperability is better for everyone involved? This is a tough question to answer but it should remain on the radar screen.