Two giants of securities settlement, Brussels-based Euroclear and the Depository Trust & Clearing Corporation (DTCC) based in New York, are creating a joint collateral
processing service to run as an industry cooperative.
Like other collateral management services, it is intended to mitigate clients’ risks associated with managing collateral.
Good quality collateral is increasingly in demand after credit rating downgrades mean some sovereign and corporate bonds are no longer adequate for use in collateral transactions used, for example, in pension fund liability management programmes, where over-the-counter (OTC) derivatives provide hedging.
Initially, the joint services will offer automatic transfer and segregation of collateral based on agreed margin calls relating to OTC derivatives and other collateralised contracts.
Mutual links will permit firms to manage collateral held at each depository as a single pool and there will be “open and non-discriminatory access” to all other collateral processing providers, including custodians and central securities depositaries, that wish to link their services to the joint service.
“The industry is focused on collateral management as a result of concerns over how to address operational and counterparty credit risk while navigating the changing regulatory landscape,” says Michael Bodson, DTCC’s president and chief executive officer.
Euroclear says it is the world’s largest provider of domestic and cross-border settlement and related services for bond, equity, derivatives and fund transactions, settling the equivalent of €542 trillion in securities transactions in 2012.
In 2012, DTCC’s subsidiaries processed securities transactions valued at approximately $1.6 quadrillion (€1.2 quadrillion).
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