A shared interest
01 October 2013
The Liquidity Alliance is aiming to have its collateral management soluions in various countries running by the end of 2013, says Strate’s Anthony Van Eden
Image: Shutterstock
The Liquidity Alliance was founded in January 2013 by five central securities depositories (CSDs)—ASX in Australia, CETIP in Brazil, Clearstream in Luxembourg, Iberclear in Spain and Strate in South Africa—to develop a common and global approach to collateral management, in line with upcoming regulations.
The financial industry is currently facing a series of regulatory challenges which have arisen in response to the infamous ‘credit crunch’ of 2007-2008.
These international rules, which include the Basel III capital adequacy regime, the US Dodd-Frank Act, the European Market Infrastructure Regulation (EMIR) and the Capital Requirements Directive (CRD IV) are putting pressure on financial institutions to improve their risk management and make transactions more secure. In particular, large market participants with worldwide operations are looking for truly international solutions to what has become a global concern: efficient collateral management.
As the implementation dates of the various regulatory measures draw closer, it is becoming urgent for financial institutions worldwide to optimise their collateral management systems and to pool their collateral in order to avoid the much-feared collateral shortage. CSDs can contribute to the relief they need, provided they have a sophisticated collateral management engine in place.
Some CSDs already played a vital role in guaranteeing stability during the financial crisis. They achieved this by providing liquidity to the market as confidence dropped and inter-bank lending almost ground to a halt. Triparty agent services in particular experienced a boom as they allowed banks to better manage and cover their exposures through a neutral infrastructure provider.
CSDs are therefore particularly well placed to help the market overcome the potential collateral shortfall by optimising collateral pools.
It therefore comes as no surprise that banks and other financial institutions turn to their CSD for support in dealing with the current challenges. Developing a workable collateral management offering for their underlying clients to avert a shortage of collateral is therefore essential for CSDs to remain competitive.
However, while CSDs around the world are feeling the mounting pressure of the upcoming regulations through increased client expectations and demands, not all CSDs have the funding, resources or international experience to develop collateral management services of their own within the required timeframe. It is therefore vital for CSDs to collaborate and to adapt already existing services and technologies to their individual market requirements.
This was the backdrop to the creation of the Liquidity Alliance, and it seemed only natural to also use a partnership approach to develop a collateral management solution. The Liquidity Alliance members decided to partner with Clearstream as it has over 20 years of experience in providing collateral management and securities lending services via its Global Liquidity Hub. Clearstream leverages this knowledge to help other organisations overcome collateral fragmentation.
Instead of each CSD having to embark on costly and lengthy IT developments, the Liquidity Alliance members use the Liquidity Hub GO solution from Clearstream as their common collateral management platform. It is currently the only service which allows assets to remain in custody in a domestic market while the system is white-labelled by the local CSD to perform sophisticated collateral management tasks such as allocation, optimisation and substitution. The development of such a customised solution for domestic markets only takes about a year and requires limited investments.
It is vital that the service does not entail moving assets out of the domestic market, as local custody is a legal requirement in many jurisdictions. Staying in the domestic market also means that the assets are governed by local laws, and the contractual arrangements between the CSDs and their customers can remain unchanged.
The Liquidity Alliance also serves as a forum for sharing experiences, identifying common needs and promoting collateral research. In other words, the Liquidity Alliance aims to go beyond the purely technical aspects of the problem. It seeks, through collaboration, to create a pool of useful knowledge about how to cope with the global collateral sourcing and servicing challenge.
In addition to sharing collateral management technology, members of the Liquidity Alliance come together on a regular basis to discuss current market developments, partnership plans and business opportunities in collateral management, while also investing resources in studies and industry research.
Since the members of the Liquidity Alliance are drawn from all over the world, they form a valuable pool of local insight and expertise that can be used on a global scale. They also act as a trusted source of information. In this way, the Alliance adds value to what could easily remain a purely operational and technical subject.
The Liquidity Alliance is already in action. While the Brazilian CSD, CETIP, has already implemented the collateral management service in July 2011, Strate is expected to go live before the end of this year, along with ASX (Australia) and Iberclear (Spain). A closer look at Strate in South Africa shows how membership of the Liquidity Alliance can support the development of domestic markets.
South Africa boasts one of the most highly developed financial sectors of the continent. Strate, South Africa’s CSD, lies at its heart, providing the local market with world-class post-trade services such as clearing and settlement.
Traditionally, banks in South Africa use cash as collateral but some financial institutions have also started using equities and bonds in the form of bilateral agreements. However, the bilateral nature of collateral arrangements in South Africa has certain limitations, such as an incomplete overview of placed and received collateral.
Market participants want services that reduce collateral fragmentation and lower inefficient collateral buffers, as well as improving the accessibility and mobility of assets useable as collateral. The ultimate goal is to improve the capital base and liquidity flow of the institution.
Strate believes that working and collaborating with market-leading partners is the best way to ensure that it remains at the forefront of international trends and local market demands and developments. In the past, strategic partnerships with global market experts such as Tata Consultancy Services (TCS) and SWIFT have played a critical role in Strate’s and the South African financial market’s success.
It was therefore in this spirit that Strate also adopted this partnership approach for collateral management; membership of the Liquidity Alliance was perfectly in line with Strate’s overarching partnership philosophy.
The most valuable aspect of the Liquidity Alliance for Strate and the other members is that it enables them to develop collateral management services for their local markets much faster and more efficiently than on their own. It allows domestic markets to develop services to customers, while simultaneously enabling them to meet regulatory requirements within the tight timeframes set by both domestic and international regulators.
Strate is currently rolling out Clearstream’s Liquidity Hub global outsourcing service for the South African market in a white-labelled manner. This means that Strate’s customers will be able to benefit from Clearstream’s market-leading Global Liquidity Hub without having to change the contract they have with Strate.
The South African market reacted very positively to Strate’s new offering as it will help local financial institutions to better manage their collateral and liquidity exposures. In addition to the important fact that the assets will remain in South Africa, market participants welcomed the idea that they would now be much better able to track collateral movements to prevent unauthorised re-use.
Strate is now fielding requests from market participants to extend the offering to include the use of offshore assets to cover domestic exposures, in addition to mobilising domestic assets for the coverage of offshore exposures. Membership of the Liquidity Alliance thereby enables Strate and its partners to be at the forefront of innovative, market-driven solutions to global problems.
The domestic markets of the Alliance members will greatly benefit from such developments as it will enhance liquidity and provide market participants with a much bigger collateral pool. The Liquidity Alliance members believe that the necessary investments are worthwhile and that this type of partnership is the way for CSDs to stay in line with market and regulatory developments.
In times when the public eye is scrutinising the risk models of financial institutions and regulators are reacting by imposing stringent measures to make financial markets more resilient to shocks, CSDs must work together not only to stay abreast of the latest developments but also to ensure that regulations are implemented in a harmonised way.
Strate’s success story is of course only one example of how the Liquidity Alliance supports CSDs. The Liquidity Alliance is open to new members and warmly welcomes other market infrastructures to join. The alliance members would be happy to support them in making their local markets more secure and in line with international standards.
The financial industry is currently facing a series of regulatory challenges which have arisen in response to the infamous ‘credit crunch’ of 2007-2008.
These international rules, which include the Basel III capital adequacy regime, the US Dodd-Frank Act, the European Market Infrastructure Regulation (EMIR) and the Capital Requirements Directive (CRD IV) are putting pressure on financial institutions to improve their risk management and make transactions more secure. In particular, large market participants with worldwide operations are looking for truly international solutions to what has become a global concern: efficient collateral management.
As the implementation dates of the various regulatory measures draw closer, it is becoming urgent for financial institutions worldwide to optimise their collateral management systems and to pool their collateral in order to avoid the much-feared collateral shortage. CSDs can contribute to the relief they need, provided they have a sophisticated collateral management engine in place.
Some CSDs already played a vital role in guaranteeing stability during the financial crisis. They achieved this by providing liquidity to the market as confidence dropped and inter-bank lending almost ground to a halt. Triparty agent services in particular experienced a boom as they allowed banks to better manage and cover their exposures through a neutral infrastructure provider.
CSDs are therefore particularly well placed to help the market overcome the potential collateral shortfall by optimising collateral pools.
It therefore comes as no surprise that banks and other financial institutions turn to their CSD for support in dealing with the current challenges. Developing a workable collateral management offering for their underlying clients to avert a shortage of collateral is therefore essential for CSDs to remain competitive.
However, while CSDs around the world are feeling the mounting pressure of the upcoming regulations through increased client expectations and demands, not all CSDs have the funding, resources or international experience to develop collateral management services of their own within the required timeframe. It is therefore vital for CSDs to collaborate and to adapt already existing services and technologies to their individual market requirements.
This was the backdrop to the creation of the Liquidity Alliance, and it seemed only natural to also use a partnership approach to develop a collateral management solution. The Liquidity Alliance members decided to partner with Clearstream as it has over 20 years of experience in providing collateral management and securities lending services via its Global Liquidity Hub. Clearstream leverages this knowledge to help other organisations overcome collateral fragmentation.
Instead of each CSD having to embark on costly and lengthy IT developments, the Liquidity Alliance members use the Liquidity Hub GO solution from Clearstream as their common collateral management platform. It is currently the only service which allows assets to remain in custody in a domestic market while the system is white-labelled by the local CSD to perform sophisticated collateral management tasks such as allocation, optimisation and substitution. The development of such a customised solution for domestic markets only takes about a year and requires limited investments.
It is vital that the service does not entail moving assets out of the domestic market, as local custody is a legal requirement in many jurisdictions. Staying in the domestic market also means that the assets are governed by local laws, and the contractual arrangements between the CSDs and their customers can remain unchanged.
The Liquidity Alliance also serves as a forum for sharing experiences, identifying common needs and promoting collateral research. In other words, the Liquidity Alliance aims to go beyond the purely technical aspects of the problem. It seeks, through collaboration, to create a pool of useful knowledge about how to cope with the global collateral sourcing and servicing challenge.
In addition to sharing collateral management technology, members of the Liquidity Alliance come together on a regular basis to discuss current market developments, partnership plans and business opportunities in collateral management, while also investing resources in studies and industry research.
Since the members of the Liquidity Alliance are drawn from all over the world, they form a valuable pool of local insight and expertise that can be used on a global scale. They also act as a trusted source of information. In this way, the Alliance adds value to what could easily remain a purely operational and technical subject.
The Liquidity Alliance is already in action. While the Brazilian CSD, CETIP, has already implemented the collateral management service in July 2011, Strate is expected to go live before the end of this year, along with ASX (Australia) and Iberclear (Spain). A closer look at Strate in South Africa shows how membership of the Liquidity Alliance can support the development of domestic markets.
South Africa boasts one of the most highly developed financial sectors of the continent. Strate, South Africa’s CSD, lies at its heart, providing the local market with world-class post-trade services such as clearing and settlement.
Traditionally, banks in South Africa use cash as collateral but some financial institutions have also started using equities and bonds in the form of bilateral agreements. However, the bilateral nature of collateral arrangements in South Africa has certain limitations, such as an incomplete overview of placed and received collateral.
Market participants want services that reduce collateral fragmentation and lower inefficient collateral buffers, as well as improving the accessibility and mobility of assets useable as collateral. The ultimate goal is to improve the capital base and liquidity flow of the institution.
Strate believes that working and collaborating with market-leading partners is the best way to ensure that it remains at the forefront of international trends and local market demands and developments. In the past, strategic partnerships with global market experts such as Tata Consultancy Services (TCS) and SWIFT have played a critical role in Strate’s and the South African financial market’s success.
It was therefore in this spirit that Strate also adopted this partnership approach for collateral management; membership of the Liquidity Alliance was perfectly in line with Strate’s overarching partnership philosophy.
The most valuable aspect of the Liquidity Alliance for Strate and the other members is that it enables them to develop collateral management services for their local markets much faster and more efficiently than on their own. It allows domestic markets to develop services to customers, while simultaneously enabling them to meet regulatory requirements within the tight timeframes set by both domestic and international regulators.
Strate is currently rolling out Clearstream’s Liquidity Hub global outsourcing service for the South African market in a white-labelled manner. This means that Strate’s customers will be able to benefit from Clearstream’s market-leading Global Liquidity Hub without having to change the contract they have with Strate.
The South African market reacted very positively to Strate’s new offering as it will help local financial institutions to better manage their collateral and liquidity exposures. In addition to the important fact that the assets will remain in South Africa, market participants welcomed the idea that they would now be much better able to track collateral movements to prevent unauthorised re-use.
Strate is now fielding requests from market participants to extend the offering to include the use of offshore assets to cover domestic exposures, in addition to mobilising domestic assets for the coverage of offshore exposures. Membership of the Liquidity Alliance thereby enables Strate and its partners to be at the forefront of innovative, market-driven solutions to global problems.
The domestic markets of the Alliance members will greatly benefit from such developments as it will enhance liquidity and provide market participants with a much bigger collateral pool. The Liquidity Alliance members believe that the necessary investments are worthwhile and that this type of partnership is the way for CSDs to stay in line with market and regulatory developments.
In times when the public eye is scrutinising the risk models of financial institutions and regulators are reacting by imposing stringent measures to make financial markets more resilient to shocks, CSDs must work together not only to stay abreast of the latest developments but also to ensure that regulations are implemented in a harmonised way.
Strate’s success story is of course only one example of how the Liquidity Alliance supports CSDs. The Liquidity Alliance is open to new members and warmly welcomes other market infrastructures to join. The alliance members would be happy to support them in making their local markets more secure and in line with international standards.
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