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Euroclear’s global “Collateral Highway” to boost collateral flows

Euroclear is embarking on a mission to create the first fully open global market infrastructure to source and mobilise collateral across borders. Euroclear’s global “Collateral Highway” will help market participants move securities from wherever they are held to serve as collateral for access to central bank liquidity, secured transactions such as repos and securities loans, and margins for CCPs and bi-laterally cleared OTC derivative trades.

Euroclear’s “Collateral Highway” (see visual below) will have multiple collateral entry and exit points. The entry points are where collateral will be sourced from all Euroclear central securities depositories (CSDs), agent banks (BNP Paribas Securities Services is the first to join), clearers and CSDs located in any time zone (the CMU unit of the Hong Kong Monetary Authority is the first to join). The securities will then be transported to where they are needed as collateral. The “Collateral Highway” is open to all CCPs, CSDs, central banks, global and local custodians, investment and commercial banks. Custodians, agent banks and CSDs without a collateral management service offering will be able to use the “Collateral Highway” as their own for their domestic clients.

“The pressures of complying with new regulations and the liquidity crisis are forcing most financial institutions to re-define their operating models for collateral management. The focus is on two areas – collateral management across silos and collateral optimisation,” said Saheed Awan, Global Head of Collateral Management Services at Euroclear.

He continued: “Financial institutions keep securities collateral in various locations for many good reasons. Thus, securities to be used as collateral are often ‘locked’ in a particular market, entity or time zone, reducing collateral management efficiency and securities optimisation for cross-border collateral purposes. We aim to resolve this problem by providing the infrastructure to move collateral where and when it is needed, no matter where it is held.”

As part of its mission, Euroclear has developed Open Inventory Sourcing technology to keep track of the collateral positions deposited by clients in various locations. Whereas Euroclear’s conventional triparty collateral management system sourced securities for collateral held only in Euroclear Bank, it will be able to search and manage virtually all client asset positions and, via the “Collateral Highway”, move the right collateral to the right collateral taker using automated processes. Euroclear will also monitor, value and substitute securities used as collateral when and if needed during the lifecycle of the transaction, and return the securities to the original place of deposit when they are no longer needed.

Jo Van de Velde, Managing Director and Head of Product Management at Euroclear, said: “As central banks and CCPs are to become the biggest takers of collateral, and given the amounts of collateral required, it is important that the market has a systemic and open solution to maximise collateral availability and mobility across borders 24 hours per day. As Euroclear already has a proven collateral management infrastructure, relationships with more than 90 central banks and CCPs, and the ability to facilitate the transformation of ineligible collateral into central bank and CCP-eligible collateral, our ‘Collateral Highway’ can be leveraged easily and efficiently.”

Furthermore, with the European Central Bank’s recent announcement to discontinue preparations for the Collateral Central Bank Management (CCBM2) project - a common platform for Eurosystem collateral management – such a “Collateral Highway” can become even more relevant and useful.