SPONSORED PROFILE: Collateral highway

Funds Europe talks to Jo Van de Velde about Euroclear’s highlights of 2013 and plans for the future.

One of the brightest highlights of 2013 for Euroclear relates to the work that has been done in Russia. As international banks look to diversify their securities portfolios, the flow of money into emerging markets has increased.

So too has the desire to see a greater involvement from proven international infrastructure providers so that these emerging markets can benefit fully from increased capital flows and trading activity, says Jo van de Velde, managing director and head of product management at Euroclear.

In February 2013, Euroclear Bank established a link with the Russian market to provide securities settlement and asset servicing for Russian government bonds (OFZs), via its link with the Russian central securities depository (CSD.) “Our service opens the channel for far greater levels of international investment – in fact we saw foreign holdings in these OFZ assets grow from approximately 7% to 25%. We have recently expanded the service to include the equally important corporate and municipal debt markets. And later this year we will add equities so that we have a post-trade service for the complete range of asset classes in Russia.”

Euroclear’s Russian service offering has inspired other emerging markets to investigate making similar changes to their capital markets infrastructure and to make their capital markets more secure, efficient and accessible to international investors. He says opportunities are being explored in India, Turkey and some countries in Latin America.

Another market-led development for Euroclear has been the partnership with BlackRock around the issuance and settlement of the first ever iShares Exchange Traded Fund (ETF) in an international structure to remove the current complexities and costs around cross-border ETF trades. Due to historic reasons, ETFs are predominantly listed, issued and marketed on a domestic basis.  But, the appeal to international investors means that the same ETF is today typically listed on multiple exchanges, making cross-border ETF transactions more laborious and more expensive to settle.

“The intention with BlackRock is to create international ETFs, similar to what we have done with Eurobonds. We launched the first iShares ETF which is now listed and trading on the LSE and the NYSE/Euronext Amsterdam. And we expect more exchanges to follow. “The international ETFs will settle with an ICSD like Euroclear. We believe that this will make these ETFs extremely efficient and help to create a pan-European ETF market. It is currently worth more than €300 billion but the ETF demand among investors is growing, so it is important that we, along with distributors, are able to create a market infrastructure that can facilitate this growth.”

A third highlight of 2013 relates to the continuing effort to increase automation in the funds processing market and Van de Velde cites the partnership between Euroclear UK & Ireland and FNZ, a provider of custody services for the global wealth management sector, to integrate its fund settlement process as an example of the fund industry’s growing appetite for straight-through processing.  

While the aforementioned highlights of 2013 have been very much market-led, the relentless stream of regulation has also influenced Euroclear’s developments. Some of this regulation will have a direct impact on Euroclear, such as the CSD-R which will for example impose a shortened settlement cycle (T+2) and greater settlement discipline on European CSDs.

However, the majority of regulatory developments affect Euroclear’s clients more than Euroclear itself.

“The mandatory clearing, the demand for more transparency, the segregation of assets and so forth sees a regulatory push for greater use and creation of capital market infrastructure. Although there is an initial cost involved with these changes, there are also some benefits. Greater use of infrastructure – and co-operation between such infrastructure providers – is an ideal way to further mutualise costs and to allow banks to maintain their return on equity.”

Regulatory developments have also introduced the possibility of new entrants and increased competition in the CSD space, with BNY Mellon becoming the first global custodian to adopt CSD status. However, he believes collaboration rather than competition will be more important for market participants.

He highlights the work that Euroclear has already delivered with Banque de France. Euroclear is providing its collateral management service (CMS) to the French national bank to assist it with the management of collateral taken as part of its open market operations with financial firms in this market.

Triparty collateral management is another domain where there have been record levels of growth, says Van de Velde. Euroclear mobilises around €800 billion worth of clients’ assets on its Collateral Highway service, a 12% growth on the 2012 figure. Contrastingly, the European repo market has contracted by 8% in the last six months. Van de Velde says that this reflects the general move away from unsecured trades to collateral-based trades as a result of post-crisis regulation.

Van de Velde sees two big drivers for growth in the collateral management market. The first is that managing collateral will itself become a much more operationally complex task with rules about haircuts, eligibility and the re-usability of collateral; the increase in initial margin calls both on a daily and intra-day basis; and more parties involved including the CCPs, the custodians and the buy-side.  “These changes will require more transparency, more reporting and more operational discipline. This is why firms are increasingly looking at tri-partite collateral management services like Euroclear’s Collateral Highway.”

The second big driver is the demand. As a result of central clearing under Emir and Dodd Frank, there is expected to be an even greater demand for high quality collateral. “The issue is not the overall scarcity of collateral, but rather the bigger problem of ensuring that the right collateral is in the right place at the right time – it is about the velocity and mobility of securities collateral.”

“Via our agreements with certain agent banks, we offer a single inventory for all global collateral and our Collateral Highway ensures that collateral is optimally sourced, allocated and mobilised, wherever it may be.”

Euroclear has signed agreements with Citi, BP2S and Standard Chartered among others, and Van de Velde expects more interest in the service once Euroclear completes a plan to collaborate with the US-based Depository Trust and Clearing Corporation (DTCC), combining two of the largest collateral pools (potentially in excess of €60 trillion of assets) and what Van de Velde calls a “one-stop-shop for firms’ global collateral management needs.”

He expects 2014 and beyond to be successful for infrastructure and the industry as a whole. “All regulatory changes will come at a cost but if we have more integrated infrastructure, we’ll have a more efficient and secure market and that will benefit all.”

Jo Van de Velde is Managing Director at Euroclear

©2014 funds europe



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