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May 13, 2013 11:35 am
Two of the world’s largest post-trade services providers are to offer access to each other’s vast inventory of collateral in a bid to ease banks’ search for scarce assets to back trading.
The US’s Depository Trust and Clearing Corporation and Belgium’s Euroclear are to develop a joint collateral processing service, as investors search for more high-quality assets to comply with the new rules on derivatives trades.
The move highlights how the hunt for collateral or “insurance” for trading is becoming a critical issue for many banks and market-infrastructure operators. New regulations such as the Dodd-Frank Act and Basel III are pushing for more counterparties like banks and clearing houses to hold more collateral to back open-ended derivatives contracts, as protection against customer defaults.
Post-trade service providers such as clearing houses collect collateral, typically highly liquid assets like top-rated government bonds or cash. But the onerous legislative requirements have prompted an industry debate on whether there will be a global shortfall of collateral.
As markets legislation gets tighter, the frequency of daily margin calls from counterparties is expected to rise sixfold, executives say. That will put strain on a system still partly dependent on manual inputting.
“Investment banks want to mobilise all of their assets as rapidly as possible to meet their obligations for ever more demanding needs, like accessing liquidity or collateralising their securities lending transactions,” said Saheed Awan, global head of collateral services at Euroclear. “It’s about sourcing them and moving them to the right place and the right time.”
Brussels-based Euroclear will allow DTCC customers access to its collateral management system and vice versa. Euroclear holds more than €20tn of collateral, with the majority consisting of high-quality fixed income assets.
DTCC, whose depository provides custody and asset servicing for securities issues valued at $37.2tn, is building a similar system, called the Margin Transit Utility. Michael Bodson, chief executive of DTCC, said the utility would provide straight-through processing of securities, helping to automate the process.
The venture will initially offer automatic transfer and segregation of collateral based on agreed margin calls for over-the-counter derivatives and other collateralised contracts. In time the two plan to manage collateral held at both firms’ depositories as a single pool.
The project, which is currently a memorandum of understanding between the two parties, is set to debut in the US in the third quarter of next year. Later parts of the project will be rolled out in 2015. Costs and revenues will be shared between the two parties.
Mr Awan said investors and agent banks would be able to source European government as well as some corporate bonds. But US Treasuries would be outside the scope of the project as they use a different settlement system.
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