Clearstream
Christian Rossler
18 February 2014
Clearstream’s Christian Rossler, head of global securities financing, sales and relationship management, highlights Asian markets’ positions on collateral management
Image: Shutterstock
Have you seen any traction in collateral management in Asia?
From Clearstream’s perspective, a lot of progress has been made. This is true for our classic services, but it is also true for new services, which we have developed in partnership with other players, like central securities depositories (CSDs) and stock exchanges around the globe.
In Asia, developments differ in collateral management across the region. There has been traction in collateral management in Australia, followed by Hong Kong and now Singapore. Collateral management is becoming a hot topic, because of the upcoming rules and regulations that will force banks and the buy side to go into secured financing, meaning that they will no longer be able to lend or borrow cash on an unsecured basis. Banks in Australia, Hong Kong and Singapore are moving fastest towards preparing for collateralised trading. Japan is slower.
Where is Asia at with new regulations?
Many financial institutions in Asia have not yet begun to fully appreciate the high cost of inefficient collateral management. Domestic regulators have delayed the issuing of many collateral related rules so as to allow time to adjust to North American and European Regulations. However, although collateral specific rules may be slower to arrive in Asia than in other parts of the world, domestic regulators have made progress on their Basel III capital rulemaking. Some Asian jurisdictions have said that they want to adopt Basel III, so this is something that will have an impact on financial intermediaries in Asia, meaning not just domestic or local banks, but also branches of foreign institutions in Asia.
Singapore, for example, wants to apply Basel III to the highest possible standards, which would mean that branches of foreign institutions in Singapore would also need to comply with LCR (liquidity coverage ratio) in the host country Singapore rather than the sole parent in the home country. This is good for us, because those branches would need collateral management services.
What is the overall economic situation in Asia, and what effect is this having on demands for collateral management?
There is still a lot of cheap cash in Asia, meaning that banks and corporates still lend each other cash on an unsecured basis.
Additionally, some of the markets do not take off because cash as collateral is still cheaper than securities as collateral. We are about to launch a partnership with the Hong Kong Monetary Authority (HKMA), which has already partnered with other triparty agents, but those platforms have gained no traction as yet. One of the reasons for this is that there is still a lot of cash collateral being pledged in Hong Kong, meaning that banks that are long in renminbi would rather swap it against US dollars instead of placing it in repo transactions and taking in collateral. That is something that is linked to the low-interest rate environment, so if that changes, it will also push banks into secured financing in that part of the world.
What is Clearstream doing in Singapore?
Recently, the SGX (the stock exchange) in Singapore signed a letter of intent with Clearstream aimed at developing new collateral management services for Singapore. The new service—offered on a white-labelled basis via Clearstream’s fully automated real-time collateral management engine—will allow SGX to offer to Singapore market participants the allocation, optimisation and substitution of domestic collateral to cover domestic exposures. A unique feature of this set-up via Clearstream is that the assets won’t have to leave their domestic environment. SGX is the first market infrastructure in Asia that together with Clearstream has the ambition to extend the offering into the broader Asian region.
Why does phase one focus on domestic collateral?
The point of the first phase is that domestic collateral remains in the domestic market, on the books of the CSD. It is very important that they keep control of their assets, because in a default situation, they do not want to have the collateral somewhere offshore.
Most regulators around the globe are trying to increase transparency of the financial markets and aim to better control and/or monitor their local environment. One important lesson from the crisis is that systemic risk has to be reduced going forward. When we talk about triparty operations, there can be a concern that having a huge chunk of collateral with just one agent leads to a dangerous concentration risk. As a solution to this, local neutral infrastructure like CSDs and stock exchanges are encouraged to establish triparty arrangements for their local markets which are connectable cross-border, but with a strict approval process controlled by the regulators. We have developed our Liquidity Hub GO (global outsourcing of collateral management) to fit this key requirement.
What challenges is Asia facing with collateral management?
The emerging realisation of the cost of collateral inefficiency is driving infrastructure providers in Asia to begin looking for specialist partners, which can provide sophisticated and yet cost-effective and time-efficient collateral management capability. This trend also fed into the rational for Clearstream to establish the Liquidity Alliance, an association of infrastructures which are all using Clearstream’s collateral management technology and who can share and exchange their expertise, experience and best practice in this area.
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