Clearstream Banking: Clear flexibility in collateral management – Philip Brown

Wide-ranging regulatory reform is having a major impact on Europe's financial markets. Philip Brown, Clearstream Banking's head of client relations, Europe & Americas, discusses the challenges that banks are facing - and how the right collateral management tools can help.

The introduction of Basel III, EMIR and Dodd-Frank will require systemic changes for financial institutions. Risk management is now the regulators' first priority and this will have an enormous impact on the way European and US institutions secure their exposures. In short, the whole market will soon need a great deal of collateral - an already scarce resource.

Today's financial institutions operate in a complex environment and many do not have a clear overview of their globally available collateral, nor the technology required to perform complicated and secure collateral management. However, as some regulations will kick in as early as 2012, this issue is now urgent. About six years ago, Clearstream decided to invest heavily in collateral management, resulting in the launch of its award-winning Global Liquidity Hub, a sophisticated and flexible liquidity and risk management environment that enables liquidity management across time zones, asset classes and currencies.

"You can normally deliver liquidity directly to, for example, your home central bank, but often, if something happens to the collateral in the ensuing time, it will be rejected as ineligible," says Philip Brown, Clearstream's head of client relations, Europe & Americas. "We won't reject it and we will service that asset while we hold it. Clients can seek funding from the central bank and we will automatically allocate collateral from their account in exchange for these funds. It's the fully automated mobilisation of collateral products."

Arm's length management

A recent evolution of Clearstream's collateral management services is Liquidity Hub GO (global outsourcing): Clearstream white-labels its services to third parties who can then offer sophisticated collateral management services in the respective market to their customer base. In July 2011, Clearstream launched the service with Brazilian CSD CETIP, which is now managing its local clients' collateral while all the underlying assets remain in Brazil, as required by law - a unique set-up that strengthens the domestic infrastructure rather than weakening it.

The CETIP solution had a time-to-market of one year and was more cost-effective than if the CSD had built its own
system from scratch. "Information on exposures - valuations and the positions held in the market - are fed directly into the Clearstream system," explains Brown. "We run an algorithm over all of that information to discover which collateral should be moved against which counterparty, and how to do it in the most efficient and cost-effective manner." Clearstream is already developing the service for the Australian Securities Exchange and is in talks with other infrastructures worldwide.

Brown says demand was even higher than anticipated. "This is the first time in my career where we've had to ask customers if they are willing to wait," he says. "Where previously clients might have focused on price and operational niceties, now it's all about risk and everyone needs solutions. We are now transforming into a risk management organisation."

New era for OTC derivatives

EMIR is also set to have a major impact on the trading of over-the-counter (OTC) derivatives. In an effort to make the European OTC market more transparent, business taking place off-exchange is increasingly being brought on exchange, or at least into a central counterparty (CCP) to benefit from the risk mitigation mechanism inherent a CCP.

Derivatives that are unsuitable to go through a CCP - because they represent an unquantifiable risk or contain insufficient liquidity - will have to be registered on a trade repository reporting to the new European regulator. Additionally, all these trades should be backed up with collateral, again requiring a sophisticated collateral management solution.

Clearstream has joined BME, the Spanish stock exchange, to create REGIS-TR, a multi-asset-class trade repository for derivatives that enables market players to comply with the new regulations. "We will support interest rate swaps, credit default swaps, foreign exchange derivatives, commodities and all other kinds, such as equities," explains Brown.

"On top of this multi-asset-class focus, we also differ in that we aim to serve the whole market, whereas our competitors principally focus on the needs of the top 14 global broker dealers. However, this regulation doesn't just affect them - it also affects mid-sized banks and corporates, including mutual funds, pension funds and insurance companies."

In 2012, REGIS-TR's services will expand to offer customers access to Clearstream's collateral management capabilities.