Clearstream and Eurex say they have made several enhancements in their trading, clearing and settlement infrastructure and processes to enable repo traders to achieve balance sheet netting and benefit from the highly-liquid and flexible GC Pooling triparty repo market.
The Deutsche Boerse subsidiaries argue that substantial balance sheet consumption from repo trading continues to constrain banks and broker-dealers and limits their ability to provide clients with liquidity.
The firms laid out their progress in tackling the challenge of netting in a recent white paper — Innovations with balance sheet netting solutions for repo trading — which presents a high-level overview of the GC Pooling and Special Repo markets as well as its growing interlinkage and the inefficiencies resulting from the inability to achieve netting.
The enhancements are designed to satisfy the requirements for netting under the International Financial Reporting Standards (IFRS) and the US Generally Accepted Accounting Principle (GAAP) which allow banks to achieve capital efficiencies by offsetting financial assets (reverse repos) with financial liabilities (repos).
The entities aim to encourage greater netting capabilities by making the meeting of these measurements a mandatory requirement of engaging with the Eurex GC Market.
Under these frameworks, netting requires the repo and the reverse repo face the same counterparty, which Eurex achieves by structuring all trade to face Eurex Clearing.
A repo and reverse repo also need to have the same explicit settlement date and be governed by a master netting agreement, which are required to be completed to participate in Eurex’s GC Pooling and Special markets.
The standards also require an intent either to settle on a net basis, or to realise the asset and the liability simultaneously. Eurex says the existence of a single cash account for transacting the cash inflows and cash outflows provides strong support for this objective.
Historically, Eurex says, GC Pooling was settled through central bank money, while Special Repo has been settled through commercial bank money.
But, in response to client’s requirements to meet the IFRS and US GAAP standards, Clearstream now offers a dedicated cash account for GC Pooling and special activities, settled through commercial bank money.
In the future, this solution is expected to be complemented by a central bank money solution, subject to completion of the T2/T2S consolidation project by the European Central Bank, Eurex says.
Finally, Eurex’ guidance on the accounting standards encourages the availability of intraday credit lines at the settlement date, and that there is a high probability that those credit lines will be honored.
Clearstream provides credit lines in support of client’s requirements for balance
sheet netting for Special Repo.
As long as those credit lines remain fully-collateralised in line with Clearstream’s requirements, there is no reason to believe that they would be withdrawn, Eurex explains.
Clearstream and Eurex state that they are now able to deliver capital efficiencies for participants in the European repo market landscape.
The enhancements, Eurex says, complements the ongoing initiatives to support direct buy-side participation in cleared repo markets, which then allows banks and broker-dealers to unlock the capital benefits from multilateral netting through the clearinghouse.
By enhancing collateral mobility and credit efficiency for post-trade market participants, Clearstream continues to improve access to liquidity and to securities financing markets across the Eurosystem.
Writing in the whitepaper, Matthias Graulich, member of the executive board at Eurex Clearing and member of the management board of Eurex Repo, says: “Running the funding and the securities-driven repo business via the same platform, central counterparty and settlement system provides unique benefits for our clients, significantly reducing capital requirements for a more efficient and profitable business.”
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