The basis of an effective collateral management system is the network – how much in collateral assets, how many partners and how far does a system’s reach extend? As competitors work to build their hubs, highways and services, we look at the value of the networks reported thus far by BNY Mellon, Clearstream, Euroclear and JPMorgan. This article is for Finadium research subscribers only.
We look at two metrics to evaluate the value of a network. The first is assets under custody of both the “hub” institution and its partners. The second is the amount of collateral business they currently conduct by geography. We use these data to infer some ideas about which networks might be off to a better start and for what reasons. We emphasize that these are early days still in the collateral management space – these are some initial observations based on the data. Lastly, we discuss how we might look at the value of connectivity to clearing firms as a third metric.
Assets under custody show the potential pool that could go into a collateral management service. The custody data we collected show Euroclear and BNYM with a commanding lead among their own assets under custody, but Euroclear has been adding partners. Clearstream’s announced MOUs with other Central Securities Depositories suggests it also has a broad network of assets to draw on but that these may take a longer time to develop. Going forward, we expect it will be easier for the CSDs to add partners to their networks that are also CSDs or custody holders. BNYM and JPM are likely too competitive for a BNP Paribas to sign onto their services as a custodial agent as they did with both Clearstream and Euroclear. We will be watching closely to see if BNYM’s new European CSD changes the competitive partnership equation for other CSDs worldwide.
Update: Following publication of this analysis, both Euroclear and Clearstream announced that Citi has signed an LOI to join their networks. That adds an additional US$2 trillion to each CSD that Citi holds directly as custodian and another US$10.5 trillion if you want to add subcustodial assets.
We also collected or estimated the value of current collateral managed for third parties, but there are some apples and oranges here. As one example, BNY Mellon’s data from their Q3 2012 financial report show broker-dealer collateral held of $2.009 trillion. This is all tri-party, we figure, so we added in collateral from securities lending programs as well. BNYM’s Global Collateral Services group manages OTC derivatives collateral as well but the firm does not yet publish these figures separately.
JPMorgan’s data are more opaque: we rely primarily on our estimates of tri-party and securities lending volumes, each based on data points we’ve collected over the years. For example, we think that JPM has about US$700 billion in tri-party assets split between the US, Europe and the rest of the world. Clearstream and Euroclear’s figures are reported regularly in aggregate but it is not possible to break out these figures by product type.
These actual and estimated data show BNYM with a commanding lead in managing other people’s collateral by virtue of its US tri-party and global securities lending businesses. Take those out and BNYM is on par with Euroclear pretty quickly. Watchers of competition in the collateral space might want to keep an ear to the ground on the Federal Reserve’s thinking about settlement concentration risk in US tri-party repo.
Looking at the custody and collateral data together, our view is that while BNYM is clearly in front, it will have to work to be less threatening to other big pools of assets, including other custodians, to become an interconnected collateral hub. Euroclear and Clearstream are heading fast in the right direction, although now they need to turn their press releases into actual transactions and flow. JPM may see more success with clearing firms worldwide, but we do not expect them to link up with CSDs or other custodians any time soon.
The value of connecting to clearing firms for collateral management networks is an area that we’ll be getting back to in the future. JPMorgan announced a connection to the Hong Kong Monetary Authority in June 2012 at the same time as Euroclear. Clearstream made a similar deal in October 2012. In all three cases this deal was with the Central Moneymarkets Unit, a clearing and settlement facility, and not a custodial account holder itself, so we didn’t count any assets here, and we didn’t think that using the Hong Kong Monetary Authority’s total deposits was an accurate proxy. We think that a look at clearing volumes for repo and OTC derivatives would yield some other potentially interesting information on the future of the collateral management market. For example, the HKMA deal might sound more attractive if we knew clearly how much repo business was happening at the CMU. Likewise, Euroclear’s agreement to facilitate collateral movements for CME Clearing Europe, while small today, could turn into a pivotal agreement if CME Europe gathers momentum. BNYM got a part of that CME Clearing Europe deal too.
As this analysis is a work in progress, we welcome feedback on additional data points that would strengthen our conclusions.