Frank Reiss, head of global financing product management at Euroclear, talks to SLT about shifts in collateral management behaviour in the aftermath of the global financial crisis
Image: Shutterstock
SLT: In terms of collateral management, what have been the biggest changes post-crisis?
Frank Reiss: Financial firms are still very conscious of the risks rooted in recent periods of economic turbulence. Prior to the crisis, the bulk of Europe’s triparty collateral management business supported repo and securities lending transactions, using securities as collateral. Today, we are seeing more demand to cover other types of exposures, including OTC derivatives, CCP margins and for central bank liquidity.
There has also been a shift in the use of securities as collateral. There is now a tendency to only accept high quality types of assets as eligible collateral in commercial transactions. Today, top rated securities are in scarce supply and hence we see our clients looking to be more innovative in how they optimise their assets as collateral. This includes securities and cash, as well as new asset classes, like syndicated loans.
SLT: The ongoing financial crisis has seen regulators propose new regulation and expand existing scope. Is this a help or a hindrance?
Reiss: There is a whole raft of pending legislation. It very much depends where you stand in terms of additional regulation being a help or a hindrance. Any new regulation which improves our capital markets is to be welcomed. But new regulation must not come at the cost of restricting liquidity or hindering competition.
One concrete result of the crisis and the pending new rules is an increase in regulatory over-sight. Gone are the old days of ‘light-touch’ supervision and unsecured lending. Regulations such as Dodd-Frank and EMIR are pushing OTC derivative transactions to be centrally cleared in secure environments such as central counterparty (CCP) clearing houses. In order to cover the increasing collateral requirements for OTC derivatives or CCP margining, clients aim to capitalise on the Euroclear triparty environment to post cash as collateral, in addition to securities.
SLT: What is Euroclear doing to assist market practitioners with collateral administration and management?
Reiss: Earlier this year, Euroclear launched a service to mobilise cash as collateral in a risk-controlled way within the triparty environment. When cash is received as collateral, clients need cash re-investment possibilities. So, we have developed options for clients to reinvest the cash received as collateral in triparty.
One of them is to reinvest cash into a money market fund via FundSettle - Euroclear Bank’s dedicated platform for cross-border fund processing. We have teamed up with BlackRock, one of the world’s leading asset managers, to make their money market funds available for cash collateral re-investment.
Other large asset management houses are also signing up to work with us on this new service. Euroclear Bank is offering cash re-investment services in these funds for clients receiving cash collateral for virtually any triparty transaction. It is particularly useful when clients receive cash as collateral while collateral acceptance criteria are redefined due to rating downgrades.
Another example is Euroclear Bank’s role in collateral transformations. We are increasingly assisting clients that do not have readily available asset classes of collateral to meet the eligibility requirements agreed with the collateral taker. Through our triparty services, we transform available collateral such as cash and/or equities into eligible collateral, such as fixed income securities.
NO FEE, NO RISK 100% ON RETURNSIf you invest in only one securities finance news source this
year, make sure it is your free subscription to Securities Finance Times
Image: Shutterstock 
