The DTCC/Euroclear Joint Venture: the real deal or smoke and mirrors?

The big news in collateral management this week was the approved joint venture between DTCC and Euroclear. This had been in the works for a while and is no surprise. The next step is to understand what this potential game changer means for the market.

The actual press release announcing the approval didn’t say much. It affirmed that both sides have been authorized to “finalize negotiations to establish a joint venture (JV) to deliver a collateral processing infrastructure.” Said infrastructure will focus on the Margin Transit Utility (MTU) and on a Collateral Management Utility (CMU) for collateral mobility.

Does this matter? Although DTCC says that the MTU is popular, we aren’t seeing it. This seems like a “we’ll announce it and see who shows interest” play as opposed to anything that is built and ready to deliver. The major collateral vendors besides OMGEO are largely ignoring the MTU for now, but of course if clients ask for it then they will get serious about integration. OMGEO, owned by DTCC, would logically be the most excited about a new technology built by its parent company, but we haven’t spoken with any OMGEO client that reports a similar enthusiasm. We would not discount the possibility of the MTU gaining traction in the future but that future is some years away. For now we’ll put this in the wait-and-see category.

The Collateral Management Utility on the other hand is an immediate and potent force in collateral management markets. It sounds like an Americanized version of Euroclear’s Collateral Highway, which now contributes to the US$1 trillion in daily processed collateral volumes at Euroclear. We understand that the goal of the Collateral Highway is to be the base infrastructure of global collateral mobilization, allowing banks, Central Banks, CCPs, etc. to then layer on other services on top. While this is direct competition to any other big collateral player like Clearstream, BNY Mellon or J.P. Morgan, it is a welcome help to the many other institutions that do not want to support, or can not invest in, their own collateral infrastructures. Euroclear argues that their Collateral Highway/tri-party pricing is the lowest in the business, a fact unconfirmed by buyers, but still impactful given that Euroclear will tell you their pricing at the drop of a hat while others are more reticent.

On a speculative note, could a US CMU be a boon to BNY Mellon and J.P. Morgan and not a threat? Both firms have invested heavily to meet the requirements of US tri-party reform. We are certain that neither firm wants to throw that money away. On the other hand, if the CMU can offer some sort of credit exposure relief then it could effectively take on the messy portions of tri-party while leaving BNYM and JPM with the parts they want to keep. There are no panaceas here – its not like Euroclear and the DTCC can overnight resolve big issues like fire-sale risk. But a new entrant to the US markets could make life easier for BNYM and JPM in other ways.

Our verdicts: the Margin Transit Utility looks like smoke and mirrors, at least for 2014. The Collateral Management Utility looks like the real deal.

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