Euroclear and the Depository Trust and Clearing Corporation (DTCC) have signed a Memorandum of Understanding (MoU) to create a joint collateral processing service to cut risk, improve market-wide efficiency and comply with the growing collateral needs of financial market participants under the weight of new regulation.
DTCC and Euroclear will establish mutual links under the MoU, permitting firms to manage collateral held at both firms' depositories as a single pool, and ease management costs. The joint service will be operated as an industry cooperative and will provide open and non-discriminatory access to all other collateral processing providers, state the partners, as they seek funds to enhance the economies-of-scale from other custodians, Central Securities Depositories (CSDs) and International CSDs, that wish to link their services to the joint service.
Initially, the joint service will offer automatic transfer and segregation of collateral based on agreed margin calls relating to over-the-counter (OTC) derivatives and other collateralised contracts. This will significantly reduce settlement risk, increase transparency around collateral processing on a global basis and provide maximum asset protection for all participants, assert the partners.
Collateral management is of primary importance under the new rules agreed at the post-crash Pittsburgh G20 meeting in 2009. This meeting demanded that OTC trading effectively go ‘on exchange’ with central counterparty (CCP) clearing meaning that collateral obligations and repository reporting are shifting under the regional legislation introducing this new environment - Dodd Frank in the US and the European Market Infrastructure Regulation (EMIR) across the Atlantic.
The new environment has already led to consolidation and services such as Euroclear’s collateral highway and similar offerings from ClearStream and other players in this space. DTCC has launched its own trade repository in Japan and merged with EMCF; the European Multilateral Clearing Facility (EMCF), one among many such consolidation deals. Indeed the whole field of collateral management faces commoditisation according to a recent SIX Securities Services survey, which will impact corporate treasurers, traders, brokers and other financial market participants.
Commenting on the latest collaborative move from DTCC and his own firm Euroclear, chief executive officer (CEO), Tim Howell, said: “As demand for collateral increases, both DTCC and Euroclear are each developing our own means to ease collateral sourcing and mobilisation for clients. Euroclear’s global Collateral Highway is a key part of our strategy to deliver such an infrastructure. We are delighted to work with DTCC and its clients to optimise the use of our collateral inventories as part of a new, joint service.”
The formation of a partial industry cooperative is also appealing to Michael Bodson, DTCC’s President and CEO, although other rivals will have to join it to increase its reach, rather than go their own way. “DTCC’s Margin Transit Utility [it’s ‘highway’ equivalent’] is currently under development,” he explained. “This will help mitigate risks, lower costs and create greater efficiencies, by providing straight-through-processing (STP) to help satisfy the obligations of clients. We look forward to leveraging the strengths of both institutions to meet the collateral needs of industry participants.”