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GFF Summit 2018

Creating more efficient and secure markets

Driving the development of the market and allowing firms to manage their funding and financing activities more effectively is one of the key roles of market infrastructure providers. Global Funding and Financing (GFF) makes it easier and more efficient for customers to manage collateral and access liquidity.

You can find the full agenda for this year's GFF Summit here.

Driving the (R)evolution of Funding & Financing Markets
Philippe Seyll (left), Co-CEO Clearstream Banking S.A. & Eric Tim Müller (right), CEO Eurex Clearing AG

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The revolution of funding and financing markets, initiated by regulatory and political factors, is taking place at the same time as the fast evolution of the financial technology while data is underpinning our collateral eco-system.

The (r)evolution has begun to redefine our market

As a result of the regulatory driven move towards more secure funding and financing mechanisms firms are seeking to access eligible collateral quickly and at affordable cost. With these developments comes a new wave of opportunities, but also new obligations requiring regulatory compliance and constant vigilance that fiduciary rules are followed.

Revolution

Against the backdrop of the changing environment, banks are increasingly taking a top-down view on risk exposure and collateral management with a strong focus on collateral and balance sheet efficiency.

Evolution

Data and technology is shaking up the way the firms and markets are organised and function. Efficiency gains in collateral management are supporting the buy-side in adapting to the changing regulatory environment.

The GFF Summit aims to give you the latest update of the market discussion. Explore our latest initiatives that have been designed to enhance collateral mobility and boost collateral efficiency to best support the required transformation process in the industry and to create a secure and efficient market with improved access to liquidity.

Our colleagues and us are looking forward to exchanging our views and creating together the new global funding and financing market.

Getting ready for a tidal change in the funding and financing markets
Marcel Naas, Global Head of Funding & Financing (GFF)

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In an ever changing landscape, market participants have had to increase their intellectual capacity in running existing operating models in today’s regulatory and capital intensive environment. Realigning critical functionality under a core umbrella has increasingly become the new standard and forward thinking organisations have restructured accordingly.

Central banks liquidity injections

Today, collateral is affected by a range of factors, including the central bank’s asset purchasing programme (APP) and negative interest rates. The ECB has announced its expanded APP to address the risks of a too prolonged period of low inflation. Purchases have now been reduced to a new monthly pace of EUR 30 bn until the end of September 2018.

Increased demand for eligible collateral

Centralised clearing of swaps has increased demand for eligible collateral, while the Liquidity Coverage and Net Stable Funding ratios have made the quality and maturity of securities on the balance sheet more important.

Regulatory pressure to hold customer and proprietary assets in segregated, rather than omnibus, accounts has further contributed to the complexity of mobilising and using collateral. This is simply because it is more difficult to manage assets held in multiple accounts in multiple locations on behalf of multiple customers than it is to manage a single pool of collateral.

In this environment, efficient mobilisation of collateral is an essential part of effective capital and liquidity management. The incentive to optimise collateral will only intensify as central banks withdraw from APP and interest rates start to rise, because the scarcity of eligible collateral is bound to increase as these things happen.

Moving towards more efficient operational practices

Our role as a leading funding and financing provider is to create solutions and facilitate firms’ efforts to move towards more efficient market and operational practices, optimising collateral with CCP and non-CCP collateral trading, facilitating mobilisation and allocation of collateral across locations and product areas.

At GFF, we are in close collaboration with customers to clearly understand how they want us to develop our global infrastructure and product solutions in order to optimise these efficiencies – where we can deliver netting efficiencies for margins and transactions, assisting effective collateral mobilisation and allocation cross-border and delivering this through an automated process.

Impact of regulatory developments on the buy-side
Frank Gast, Global Co-Head of GFF Sales and Relationship Management

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New collateral requirements for non-centrally cleared derivatives (“Uncleared Margin Rules”) in 2017 required many buy-side firms to look at more effective repo and collateral management solutions. The main initiatives focused on finding ways on how to increase the number of repo trading counterparties given limited capacity by existing sell-side relationships, to optimise the collateral utilisation and to streamline processes in order to mobilise collateral more efficiently. Further regulatory challenges, such as MIFID II, SFTR and the discussions on the mandatory buy-in rules complicated matters further.

Increasing counterparties for repo trading

In view of expanding the number of repo trading counterparties, we facilitate access to the centrally cleared Eurex Repo interbank repo market with more than 130 participants and face Eurex Clearing (CCP) as sole counterparty to all trades. By using triparty repo under Clearstream Repurchase Conditions (CRC) customers will gain access to over 80 participants without contract negotiations. In 2017, the buy-side share of our triparty repo offering increased from 18% to 25%.

The CCP-cleared repo service offers full flexibility and enables buy-side customers to maximise the use of their assets and raise cash in a fast and secure way. We established our cleared repo offering after having onboarded seven new customers throughout the year with around EUR 180bn Term Adjusted Volume in 2017.

Straight Through Processing (STP) collateral transformation

At GFF we also addressed the need for STP collateral transformation, margin optimisation and the elimination of intraday margin call risks. In order to fund initial margin obligations more efficiently whilst protecting against intraday margin call risks, our GC Pooling re-use option it best placed to meet a combined margin requirement for centrally cleared OTC IRS and Repos. Customers can furthermore leverage our triparty collateral management expertise and move collateral and post margin securities to bilateral and central counterparties globally and in real time.

Executing repos in line with regulatory requirements

In order to execute repos in line with regulatory requirements, Eurex Repo`s electronic marketplace for CCP-cleared and non-CCP-cleared securities financing transactions fulfils all MIFID II requirements and facilitates adequate SFTR reporting via the trade repository REGIS-TR.

24 non-bank institutions are already active in CCP-cleared repos and over 70 buy-side customers are using Clearstream’s collateral management and repo services. Our buy-side customers can rely on Deutsche Börse Group’s regulatory experience as trading venue, regulated market, CCP, CSD and trade repository (REGIS-TR) in managing and supporting regulatory change.

Managing the implementation of non-cleared OTC Derivative Margining Rules
Brenda Bol, Global Co-Head of GFF Sales and Relationship Management

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Regulatory developments have pushed trading of standardised derivative instrument types onto exchanges or into a CCP-cleared environment. This is prompting counterparties to review how they utilise derivatives contracts, but it does not suggest the disappearance of bilateral OTC trading. From a diversification perspective, it is clear that many banking counterparties continue to value the benefits of maintaining a broad network of bilateral relationships that they can draw upon to meet their funding and financing needs.

EMIR in Europe and Dodd Frank Act in the US require that firms post initial margin and variation margin against their bilateral OTC derivatives trading activities. The industry is seeking harmonisation in operational frameworks wherever possible when connecting with tri-party agents as required for initial margin segregation. Customers are merely asking for solutions built around standardised processes in order to facilitate automation and minimise operational risk. For example, users request that collateral eligibility profiles are applied consistently across the different collateral agents with which they have relationships.

Collective ambitions

Having completed Phases 1, 1.5 and 2 of the Margin Rules implementation successfully, firms are taking their time to evaluate the arrangements they have set in place and are looking for ways to enhance their existing solutions. Alongside a number of legal considerations, firms are reviewing the technology and communication interfaces that they currently have to support collateralisation of non-cleared OTC derivatives. Clearstream is well positioned through its collaboration with data vendors focusing on uncleared margin regulation to assist firms in optimising their eligibility profile creation across different jurisdictions and enhance STP processing internally and at triparty level.

As a tri-party agent, Clearstream verifies that the assets accepted as collateral by the customer, meet with its own internal collateral eligibility criteria and with collateral eligibility frameworks established by financial supervisors under the Margin Rules.

For OTC Margining, hundreds of new relationships and more than 500 new accounts have been opened for Phase 1 and 2. Going forward, we will implement cross-margin netting for equity finance in 2018 and fixed income early 2019 with the aim to become more attractive for equity derivatives and equity finance transactions after implementation.

Bringing CCP-specific benefits to the securities lending market
Florian Seifferer, Co-Head of GFF Business & Product Development

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Recent regulatory developments under EMIR in Europe and the Dodd Frank Act in the US to reduce systemic counterparty and operational risk have imposed the requirement for financial counterparties to clear eligible OTC derivative trades via a central counterparty (CCP) and to post initial margin and variation margin against non-cleared derivatives transactions.

Combined with the European Central Bank’s Asset Purchasing Programme (APP), we see an increasing shortage of high quality collateral in the market. The scarcity of high quality liquid collateral is expected to fuel the demand for securities lending to be increasingly collateralised through efficient triparty securities lending. Currently, Clearstream is already the 7th biggest fixed income lender and the largest EUR government bonds lender worldwide. Going forward we are aiming to support the market further by distributing HQLA assets as an agent lender via the Lending CCP.

Lending CCP enhancing security and efficiency of markets

Eurex Clearing’s Lending CCP enhances the security and efficiency of a market that traditionally has been defined by OTC bilateral transactions. The Lending CCP operates an integrated solution for fixed income and equity securities lending transactions, while providing the possibility to maintain existing business relationships between market participants.

Engagement with market participants

The business customs of the securities lending market strongly influenced the establishment of the Lending CCP. The Lending CCP retains key components of the bilateral model while introducing CCP-specific benefits such as a favourable capital treatment and an expanded counterparty base. In addition, ongoing legal and regulatory developments are driving market participants to consider greater use of electronic trading platforms and CCPs as a form of safeguard.

Buy-side view

Buy-side participants have considered a number of key issues as being most critical for their involvement in the Lending CCP. Even though capital and operational benefits are expected, the major determining factor is the opportunity cost and revenue generated for customers by choosing the Lending CCP over existing bilateral trading relationships.

The requirement to implement netting across securities lending and repo transactions results in more effective management of regulatory capital requirements while the introduction of cross-margining capabilities on centrally cleared product ranges and asset classes will create a significant positive impact on the pricing, efficiency and attractiveness of the Lending CCP.

Increasing collateral efficiency by establishing partnerships
Jean-Robert Wilkin, Head of GFF Market Development

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Partnerships are the way forward to offer buy-side customers simplified access to triparty collateral management and increase collateral efficiency.

Following the latest market and regulatory developments, the collateral eco-system has become more complex. As an infrastructure provider, we experienced a growing demand for creative solutions providing more standardisation and STP connectivity on the back of triparty services. Our collaborative approach and partnerships with vendor platforms will help the market to become more efficient.

Partnerships to increase collateral efficiency

The partnerships established or under preparation with numerous collateral exchange platforms speaks to our commitment to further increase collateral efficiency by entering into successful collaborations. Such collaborations bring together visible pricing and liquidity for secured funding and securities lending transactions with Clearstream’s simplified collateral management services for the buy-side and sell-side.

Providing buy-side customers with simplified access to triparty collateral management, creating a single collateral pool and exploring re-use and netting opportunities are among the objectives of our new Global Funding and Financing product offering.

Collaboration to grow collateral network

The collaboration with the securities finance automation providers, Pirum Systems and Equilend, offers buy-side and sell–side customers increased collateral efficiency through real-time STP connectivity. With these partnerships, we are continuing to broaden our global collateral network and enabling our customers to further increase their collateral efficiency and accuracy through real-time STP connectivity. Customers leveraging Pirum or Equilend can not only access Clearstream’s triparty collateral management services, but can also make use of Eurex Clearing’s Securities Lending CCP.

The partnership approach gives our customers the unique opportunity to leverage a single collateral pool and re-use netting opportunities available through our integrated Global Funding and Financing product offering.

Overcoming collateral fragmentation
Fabrice Tomenko, Co-Head of GFF Business & Product Development

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One of the key issues in our current global financial landscape is collateral fragmentation and the related challenges of mobilising assets held in one market to use them as collateral to cover exposures in another. This has forced banks to leave pools of collateral in each of the markets in which they operate, leading to inefficiencies in this space.

TARGET2-Securities - a first answer to cross-border frictions

The implementation of TARGET2-Securities (T2S) has simplified the challenge of mobilising collateral cross-border by introducing a single pan European settlement platform allowing pooling of domestic collateral portfolios.

At the same time, T2S has opened new opportunities for market participants to combine CSD and ICSD liquidity across asset classes leveraging Clearstream's Collateral Management Services based on the automatic allocation of collateral.

The global challenge

Global markets also require solutions outside the European markets. The US market and Japan, as an example, remain an important pool of collateral for which T2S cannot provide a solution. It is therefore up to other market infrastructures to work on solutions to overcome this global challenge. Improvement of market links, partnerships with other CSD's worldwide, such as the Liquidity Alliance (LA) or Agents banks (via our Liquidity Hub Connect offering) are key to providing our market participants with efficient ways to mobilise assets, thus reducing the need to create buffers to compensate operational inefficiencies.

Can new technology be the solution?

The increasing need for collateral mobilisation has led to an avalanche of innovation and new technologies aimed at addressing the inefficiencies in this segment.

Innovation has proven in the past to be beneficial by significantly improving operational processes, increasing straight-through processing (STP) and considerably reducing the turnaround time for settlement to evolve to more real-time processes. New technology such as Distributed Ledger Technology (DLT) could again deeply change our traditional landscape. We strongly believe that a DLT based market solution, such as our LA Ledger initiative, could enable a centralised, faster and more efficient allocation of fragmented security positions to cover financial obligations of market participants across multiple jurisdictions.

Looking forward to discussing with you our solutions to overcome these challenges.

Created By
Clearstream Banking
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