What market benefits do you believe your joint initiative will deliver?
Mark Jennis: The Depository Trust & Clearing Corporation (DTCC)/Euroclear joint collateral processing service will significantly increase efficiency, reduce risk and support the growing collateral needs of industry participants.
The industry is focused on collateral management as a result of concerns over how to address operational and counterparty credit risk, while navigating the changing regulatory landscape. This proposed new service will be designed to address these concerns.
The Margin Transit Utility, currently under development, will help to mitigate risks, lower costs and create greater efficiencies by providing STP of OTC derivative margin delivery obligations.
The linking of our collateral services through the use of Open Inventory Sourcing and similar technologies will provide consolidated inventory management and optimal collateral allocation of assets held in DTCC, Euroclear and agent banks around the world.
What will market participants need to do to benefit from it?
Saheed Awan: The beauty of our initiative is that it requires very little action be taken by market participants. We will count on our clients’ involvement in defining the specifications of the joint service and testing during the implementation period, but this is the only occasion where they would need to actively ‘do’ something specifically related to our initiative.
Euroclear and DTCC will deliver a common collateral infrastructure for market participants active on either or both sides of the Atlantic. We will offer centralised tracking of both securities and cash collateral, as well as a simplified means for optimising collateral inventories. The joint initiative will offer the market opportunities to benefit from efficiencies in margin management, collateral inventory management and collateral allocation and segregation.
Of course ‘how’ firms chose to make best use of the new infrastructure is a decision that we leave in their hands.
Why have you decided to join forces to accomplish this?
Jennis: The two firms have joined forces to leverage the collateral processing functionality and expertise from both institutions. This will enable us to deliver straight-through margin processing and to efficiently pool and allocate the substantial amounts of collateral held by both depositories against exposures globally.
How does this initiative complement Euroclear’s global Collateral Highway?
Awan: The Collateral Highway has enjoyed considerable success in Europe and is catching on in Asia with agreements already signed with Citi, BNP Paribas, the Hong Kong Monetary Authority, the Korea Securities Depository and Standard Chartered Bank. To make it truly global, the Collateral Highway needs to extend its reach, notably into the Western hemisphere. This is what we are doing with the joint collateral management initiative with DTCC.
The service we plan to jointly develop will provide consolidated inventory management and optimal collateral allocation of assets held in DTCC, Euroclear and agent banks around the world. This will provide seamless repositioning of collateral between Europe, the US and Asia.
What is the role of the Margin Transit Utility and how will Euroclear fit into this initiative?
Jennis: The Margin Transit Utility is a margin processing solution designed to service dealers/future commission merchants (FCMs) and their clients in the derivatives clearing markets, as well as to support the remaining bilateral relationships in the OTC markets. It provides STP, including the matching of margin calls between market participants, the netting of cash margin payments, the settling of US dollar and non-US dollar collateral, the safekeeping of collateral in segregated margin accounts, and the reporting and record-keeping of collateral.
The substantial benefits of the Margin Transit Utility include: (i) reduced personnel, settlement and funding costs; (ii) reduced systemic risk; (iii) increased scalability; (iv) greater transparency regarding collateral activity; and (v) the potential for linking collateral data with information reported to the Global Trade Repository, which will provide a complete view of risk exposures during a market crisis.
Euroclear will play a major role in providing this functionality for the processing of non-US collateral, including participating in the build and maintenance of this messaging hub for enrichment and routing of settlement instructions, as well as the settlement of cash and the segregation of securities.
When do you plan for this joint service to be launched?
Awan: It is still too soon to answer that question with any degree of certainty, especially as we are still scoping the services we plan to make available to the industry.
At present, DTCC’s Margin Transit Utility service is scheduled for launch in 2014 with US dollar cash followed by euro cash and finally securities collateral.
We believe that the Collateral Highway will provide a ready mechanism for the transmission of margin calls from the buy side to a transit account at the clearing member and into segregated accounts at the CCP.
The timing for the roll out of the second major part of the joint initiative—the linking of our collateral services through the use of open inventory sourcing and similar technologies—will only be known once the scoping exercise has concluded.
What do you mean when you say the joint service will operate as an industry cooperative and will provide open access to all other collateral processing providers?
Jennis: The joint collateral processing service will employ an ‘open architecture’, affording access to and by global and local custodians, other central securities depositories (CSDs) and international CSDs that wish to become part of the initiative.
Why a MoU rather than an agreement to deliver?
Awan: Signing a memorandum of understanding gives us the time we need to complete our exclusive discussions with DTCC and together define the most important aspects of the planned service for the industry.
We are working on a delivery timeframe and how the joint collateral service will be managed and maintained, taking into consideration the different time zones. We are also discussing the ownership structure and the split in revenues and costs.
Our joint initiative has the potential to have major market impact, so we must take the time to clearly define our deliverables with the industry.
How will you manage the work streams involved in delivering such a large project?
Jennis: This initiative has been divided into a number of separate projects managed under a joint Euroclear/DTCC programme. These individual projects cover the legal and regulatory aspects, the extension of operating hours for the Collateral Highway, implementation of the inventory management and collateral allocation service, development and implementation of the Margin Transit Utility, and the roll-out with clients. The scoping of the work involved in these projects has already started and the definition of deliverables has begun.
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