View from the CCP
28 May 2019
As Eurex Clearing’s CCP service continues to establish itself, Deutsche Börse Group’s Mathias Graulich discusses the outlook for the Lending CCP
Image: Shutterstock
Topics shaping the securities lending market globally are concentrated on the crucial areas of legislation and regulation as well as infrastructure and technology. More precisely, meeting the continued demand for collateral optimisation, the legal challenges surrounding Brexit, the implementation of Central Securities Depositories Regulation (CSDR) and Securities Financing Transactions Regulation (SFTR) and the drive for the enhanced use of technology solutions across the entire securities lending process.
Ongoing developments have driven market participants to analyse the impact on their securities lending businesses. Regulatory changes introduced under European Markets Infrastructure Regulation in Europe and the Dodd-Frank Act in the US were put into place to reduce systemic counterparty and operational risk and imposed the requirement for financial counterparties to centrally clear eligible over-the-counter (OTC) derivative trades and to post initial margin and variation margin against non-cleared derivatives transactions.
As a result, there is an increasing shortage of high-quality collateral in the market. The scarcity of high-quality liquid collateral is stimulating the demand for collateral transformation using securities lending as a key mechanism.
Creating and maintaining cost and capital efficient trading strategies
Market participants strive to implement beneficial capital cost-efficient methods of trading via electronic platforms and utilising central clearing as a form of safeguard. Central clearing will continue its onward march and become even more important to the market as it leads to greater safety and integrity in the financial markets. The driving factor is to continue the transformation of the securities lending market from a non-standard, bilateral OTC model to a more progressive and sustainable operating model.
Service features
Eurex Clearing’s Lending CCP covers loans in European equities, Exchange Traded Funds as well as international fixed income assets. Direct CCP access for beneficial owners via a specific lender license, provides significant benefits to market participants. It preserves the relationship-driven business structure and at the same time delivers the capital efficiency and safety associated with central clearing. The Lending CCP reduces counterparty risk exposure and eliminates the need for multiple credit evaluations. As part of Deutsche Börse, Eurex Clearing is the only infrastructure provider with an integrated clearing offering across derivatives, equities, securities lending and repo transactions.
Challenges and opportunities
The challenge for Eurex Clearing is to continue to engage and bring committed participants together to identify and form the next steps towards transforming the securities lending market. Eurex Clearing is uniquely positioned to encourage dialogue on strategy and initiatives that drive the delivery of a new phase of market access for securities lending with the aim of shaping the growth of CCP utilisation for the securities lending market. A key focus is to continue our collaboration with clients to bring innovation to the market. At Eurex Clearing, we believe that our clients and key market players are fundamental to drive the growth and transformation of central clearing for the securities lending market.
At the end of last year, we hosted a ‘CCP Think Tank’ meeting with the objective to bring committed participants together to identify and form the next steps towards ‘building a market’. As a result, the Lending CCP Strategic Committee was formalised and a number of primary work streams were identified. The Lending CCP Strategic Committee consists of BNY Mellon, BlackRock, Citi, EquiLend, J.P.Morgan, Morgan Stanley, Natixis and Pirum, has met monthly in 2019 to achieve a committed and streamlined approach for the development of the Lending CCP service.
Outlook
As far as the Lending CCP is concerned, Eurex Clearing looks forward to maintaining its role as a leading market infrastructure provider and partner to our clients. As safety and integrity are also objectives that buy-side and sell-side market participants have in common, Eurex Clearing anticipates further demand for its innovative Lending CCP service. The Lending CCP has major buy-side clients and agent lenders operative on its service and continues to extend the range of clients, markets, and assets into our offering. As a result, we expect the daily average on-loan volume to steadily increase for both equity and fixed income segments.
Ongoing developments have driven market participants to analyse the impact on their securities lending businesses. Regulatory changes introduced under European Markets Infrastructure Regulation in Europe and the Dodd-Frank Act in the US were put into place to reduce systemic counterparty and operational risk and imposed the requirement for financial counterparties to centrally clear eligible over-the-counter (OTC) derivative trades and to post initial margin and variation margin against non-cleared derivatives transactions.
As a result, there is an increasing shortage of high-quality collateral in the market. The scarcity of high-quality liquid collateral is stimulating the demand for collateral transformation using securities lending as a key mechanism.
Creating and maintaining cost and capital efficient trading strategies
Market participants strive to implement beneficial capital cost-efficient methods of trading via electronic platforms and utilising central clearing as a form of safeguard. Central clearing will continue its onward march and become even more important to the market as it leads to greater safety and integrity in the financial markets. The driving factor is to continue the transformation of the securities lending market from a non-standard, bilateral OTC model to a more progressive and sustainable operating model.
Service features
Eurex Clearing’s Lending CCP covers loans in European equities, Exchange Traded Funds as well as international fixed income assets. Direct CCP access for beneficial owners via a specific lender license, provides significant benefits to market participants. It preserves the relationship-driven business structure and at the same time delivers the capital efficiency and safety associated with central clearing. The Lending CCP reduces counterparty risk exposure and eliminates the need for multiple credit evaluations. As part of Deutsche Börse, Eurex Clearing is the only infrastructure provider with an integrated clearing offering across derivatives, equities, securities lending and repo transactions.
Challenges and opportunities
The challenge for Eurex Clearing is to continue to engage and bring committed participants together to identify and form the next steps towards transforming the securities lending market. Eurex Clearing is uniquely positioned to encourage dialogue on strategy and initiatives that drive the delivery of a new phase of market access for securities lending with the aim of shaping the growth of CCP utilisation for the securities lending market. A key focus is to continue our collaboration with clients to bring innovation to the market. At Eurex Clearing, we believe that our clients and key market players are fundamental to drive the growth and transformation of central clearing for the securities lending market.
At the end of last year, we hosted a ‘CCP Think Tank’ meeting with the objective to bring committed participants together to identify and form the next steps towards ‘building a market’. As a result, the Lending CCP Strategic Committee was formalised and a number of primary work streams were identified. The Lending CCP Strategic Committee consists of BNY Mellon, BlackRock, Citi, EquiLend, J.P.Morgan, Morgan Stanley, Natixis and Pirum, has met monthly in 2019 to achieve a committed and streamlined approach for the development of the Lending CCP service.
Outlook
As far as the Lending CCP is concerned, Eurex Clearing looks forward to maintaining its role as a leading market infrastructure provider and partner to our clients. As safety and integrity are also objectives that buy-side and sell-side market participants have in common, Eurex Clearing anticipates further demand for its innovative Lending CCP service. The Lending CCP has major buy-side clients and agent lenders operative on its service and continues to extend the range of clients, markets, and assets into our offering. As a result, we expect the daily average on-loan volume to steadily increase for both equity and fixed income segments.
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