GFF Summit 2024: between innovation and regulation
06 February 2024
The question of technology coincided with a wide range of topics at this year's Global Funding and Financing Summit in Luxembourg. Sophie Downes reports
Image: stock.adobe/Trevor Parker Photo
The question of technology coincided with a wide range of topics at this year's Global Funding and Financing Summit, which combined the expertise of Clearstream, Eurex Clearing and Eurex Repo. Delegates gathered in Luxembourg to discuss the challenges and opportunities presented by technology, regulations and market dynamics, with an emphasis on collaboration and strategic preparation for the future.
In one panel, Andreas Bohn, partner at McKinsey & Company, observed that financial institutions need to be prepared for volatility in 2024. In a discussion on liquidity management considerations for 2024, the speakers emphasised the need for risk mitigation strategies due to geopolitical and economic uncertainties.
Federico Becerra, director and head of treasury at Clearstream, aims to apply this by ensuring that exposures are fully collateralised. “We need to ensure that we have enough sources of liquidity to fulfil our payment obligations in a timely manner,” he claimed.
Becerra views the upcoming banking regulations and market discipline through the Central Securities Depositories Regulation (CSDR) as an effective means of achieving this.
“The aim of the regulations is mainly to provide safety efficiency in the settlement and custody space,” he argued. “We do not see this as a burden, but more as a confirmation that what we are doing is in line with what we are supposed to do.”
Diversifying funding sources and managing asset allocation of liquidity reserves is crucial for banks to maintain stability, asserted Tom Chater-Duchesne, treasury manager at Revolut.
“Digitisation and the speed with which your cash can move around means we need to be very nimble,” he explained. “Whenever we are considering the monetisation value of our bond portfolio, we will always look at that true monetisation value, rather than any book or redemption value that may be in the future.”
Meanwhile, infrastructure providers, such as clearing houses, face unique challenges in managing fluctuating balances and demonstrating liquidity, revealed Thomas Kurian, head of treasury and banking at ICE Clear.
Kurian believes that careful portfolio structuring and coordination is essential for mitigating these challenges, viewing stress testing as a critical practice for businesses: “We engage in a continuous process of contingency planning, default management testing and liquidity exercises. This way, we are prepared and have run through the rapid exposure drills and the default runbook steps multiple times.”
ICE Clear is particularly focused on the SEC mandatory clearing rules, which come into effect in December 2025 and will affect the US treasury market.
Kurian added: “The market community will have to figure out all of the operational legal and infrastructural aspects to make sure we are ready. Even though it sounds like it is a long way away, it is important that we make a head start.”
Technology to the rescue
Another panel developed this further, arguing that intraday liquidity management is a large and growing problem for banks, and one that must be attenuated with the use of technology.
Issues include settlement and payment fragmentation across time zones, creating liquidity drain and credit risks, and high costs associated with maintaining large buffers to cover intraday liquidity needs.
For one panellist, “these problems will persist unless technology can be used to solve them”. As self professed “big believers in a digital future”, the panel emphasised how distributed ledger technology (DLT) and digital currencies could help to overcome these issues.
Erica De Rosa, solutions architect at HQLAX, discussed the various uses of automation. “When we started developing these solutions, new technology was really used to improve the existing problems that we had.” Now, she argued, DLT can enable new markets, posing the idea that transactions could be intraday and instantaneous.
However, there are hurdles to this being achieved. For De Rosa, “it is about proving the resilience and stability of these platforms and demonstrating their benefits and necessity in the markets. We need to get past the buzzwords and just have a regular conversation when discussing the merits of the technology.”
Brian Nolan, co-founder and CEO of Finteum, continued: “Adoption by more and more participants is going to be important. With banks like UBS, NatWest and Commerzbank getting involved in digital repo and intraday, there is a great business case for it for all market participants.”
Pivotally, Nolan is optimistic for the future: “I believe that 2024 is going to be a year where more and more participants come in and start realising those benefits.”
However, another panellist was more hesitant about the uptake of automation: “Put simply, the buy side is not there yet.” Instead, he argued, the focus should be on building infrastructure and technology that will allow the buy-side community quick finality of settlement.
In summary, he contends that if this can be achieved “it will open up the global landscape”.
The question of technology fringed every discussion at the GFF Summit, and a panel exploring over-the-counter (OTC) collateral management was no different.
The speakers agreed that the use of automation could be beneficial, but posited that collaboration between industry and regulators is needed to develop solutions that work within existing rules and protections.
The panel opened with the discussion of the increasingly important, yet complex, role of collateral management in financial markets.
One panellist, representing a Dutch pension fund, discussed the difficulties faced by pension funds in efficiently managing collateral across different markets.
Given changing regulations over the last five years, for example the exemption for pension funds from posting cash collateral at central clearing parties, she asserted “that the collateral has been of more importance than ever”.
Digital transition
Grant Davies, founder at Blended Markets, highlighted the potential of DLT to address challenges in efficiently moving collateral through the derivatives clearing process.
Davies argued that, if adopted gradually, DLT and tokenisation have the potential to significantly improve collateral mobility, liquidity and efficiency.
Adrian Dale, head of regulation and market practice at the International Securities Lending Association (ISLA), advocated for the use of standardisation initiatives such as the common domain model (CDM) to realise these benefits and address current pain points and inefficiencies in the post-trade process.
However, the panel agreed that this will require collaboration between industry and regulators to develop solutions that work within existing rules and protections.
Another panellist observed that “some of the biggest hurdles are not technology based”. Leveraging technology will require collaboration from a variety of participants.
“There's multiple stakeholders in the group,” he observed. “All of those different factors are going to impact the speed of adoption.”
Altogether, the summit envisioned an optimistic outlook for the financial markets in 2024, with the use of technology posing benefits to operational efficiency, liquidity and collateral mobility.
However, successful adoption of automation will depend on collaboration between industry and regulators, and preparation on an individual business level for upcoming regulatory and infrastructural changes.
Beyond that, as one panellist posed, “we just need to have the determination to succeed”.
In one panel, Andreas Bohn, partner at McKinsey & Company, observed that financial institutions need to be prepared for volatility in 2024. In a discussion on liquidity management considerations for 2024, the speakers emphasised the need for risk mitigation strategies due to geopolitical and economic uncertainties.
Federico Becerra, director and head of treasury at Clearstream, aims to apply this by ensuring that exposures are fully collateralised. “We need to ensure that we have enough sources of liquidity to fulfil our payment obligations in a timely manner,” he claimed.
Becerra views the upcoming banking regulations and market discipline through the Central Securities Depositories Regulation (CSDR) as an effective means of achieving this.
“The aim of the regulations is mainly to provide safety efficiency in the settlement and custody space,” he argued. “We do not see this as a burden, but more as a confirmation that what we are doing is in line with what we are supposed to do.”
Diversifying funding sources and managing asset allocation of liquidity reserves is crucial for banks to maintain stability, asserted Tom Chater-Duchesne, treasury manager at Revolut.
“Digitisation and the speed with which your cash can move around means we need to be very nimble,” he explained. “Whenever we are considering the monetisation value of our bond portfolio, we will always look at that true monetisation value, rather than any book or redemption value that may be in the future.”
Meanwhile, infrastructure providers, such as clearing houses, face unique challenges in managing fluctuating balances and demonstrating liquidity, revealed Thomas Kurian, head of treasury and banking at ICE Clear.
Kurian believes that careful portfolio structuring and coordination is essential for mitigating these challenges, viewing stress testing as a critical practice for businesses: “We engage in a continuous process of contingency planning, default management testing and liquidity exercises. This way, we are prepared and have run through the rapid exposure drills and the default runbook steps multiple times.”
ICE Clear is particularly focused on the SEC mandatory clearing rules, which come into effect in December 2025 and will affect the US treasury market.
Kurian added: “The market community will have to figure out all of the operational legal and infrastructural aspects to make sure we are ready. Even though it sounds like it is a long way away, it is important that we make a head start.”
Technology to the rescue
Another panel developed this further, arguing that intraday liquidity management is a large and growing problem for banks, and one that must be attenuated with the use of technology.
Issues include settlement and payment fragmentation across time zones, creating liquidity drain and credit risks, and high costs associated with maintaining large buffers to cover intraday liquidity needs.
For one panellist, “these problems will persist unless technology can be used to solve them”. As self professed “big believers in a digital future”, the panel emphasised how distributed ledger technology (DLT) and digital currencies could help to overcome these issues.
Erica De Rosa, solutions architect at HQLAX, discussed the various uses of automation. “When we started developing these solutions, new technology was really used to improve the existing problems that we had.” Now, she argued, DLT can enable new markets, posing the idea that transactions could be intraday and instantaneous.
However, there are hurdles to this being achieved. For De Rosa, “it is about proving the resilience and stability of these platforms and demonstrating their benefits and necessity in the markets. We need to get past the buzzwords and just have a regular conversation when discussing the merits of the technology.”
Brian Nolan, co-founder and CEO of Finteum, continued: “Adoption by more and more participants is going to be important. With banks like UBS, NatWest and Commerzbank getting involved in digital repo and intraday, there is a great business case for it for all market participants.”
Pivotally, Nolan is optimistic for the future: “I believe that 2024 is going to be a year where more and more participants come in and start realising those benefits.”
However, another panellist was more hesitant about the uptake of automation: “Put simply, the buy side is not there yet.” Instead, he argued, the focus should be on building infrastructure and technology that will allow the buy-side community quick finality of settlement.
In summary, he contends that if this can be achieved “it will open up the global landscape”.
The question of technology fringed every discussion at the GFF Summit, and a panel exploring over-the-counter (OTC) collateral management was no different.
The speakers agreed that the use of automation could be beneficial, but posited that collaboration between industry and regulators is needed to develop solutions that work within existing rules and protections.
The panel opened with the discussion of the increasingly important, yet complex, role of collateral management in financial markets.
One panellist, representing a Dutch pension fund, discussed the difficulties faced by pension funds in efficiently managing collateral across different markets.
Given changing regulations over the last five years, for example the exemption for pension funds from posting cash collateral at central clearing parties, she asserted “that the collateral has been of more importance than ever”.
Digital transition
Grant Davies, founder at Blended Markets, highlighted the potential of DLT to address challenges in efficiently moving collateral through the derivatives clearing process.
Davies argued that, if adopted gradually, DLT and tokenisation have the potential to significantly improve collateral mobility, liquidity and efficiency.
Adrian Dale, head of regulation and market practice at the International Securities Lending Association (ISLA), advocated for the use of standardisation initiatives such as the common domain model (CDM) to realise these benefits and address current pain points and inefficiencies in the post-trade process.
However, the panel agreed that this will require collaboration between industry and regulators to develop solutions that work within existing rules and protections.
Another panellist observed that “some of the biggest hurdles are not technology based”. Leveraging technology will require collaboration from a variety of participants.
“There's multiple stakeholders in the group,” he observed. “All of those different factors are going to impact the speed of adoption.”
Altogether, the summit envisioned an optimistic outlook for the financial markets in 2024, with the use of technology posing benefits to operational efficiency, liquidity and collateral mobility.
However, successful adoption of automation will depend on collaboration between industry and regulators, and preparation on an individual business level for upcoming regulatory and infrastructural changes.
Beyond that, as one panellist posed, “we just need to have the determination to succeed”.
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