The world’s local collateral manager
24 February 2015
Clearstream is constantly enhancing its services under the Global Liquidity Hub with innovative solutions to allow for more efficient use of scarce collateral
Image: Shutterstock
Clearstream’s Global Liquidity Hub was launched in 2009. It was developed based on Clearstream’s longstanding experience in providing collateral management and securities lending services. In fact, Clearstream has been providing automatic securities lending since 1979, while the triparty repo service was launched in 1992.
Over time, this business segment has grown and now manages more than €600 billion of collateral outstanding and services more than 550 clients, including major central banks and central counterparts around the globe.
Clearstream has a longstanding presence in Asia, so it is only natural to also provide extensive services under the Global Liquidity Hub for this fast-growing market. Clearstream is very well established as a leading post-trade service provider with links to 54 domestic markets worldwide.
Lotfi Bettahar, global securities finance head of the Asia Pacific, Middle East and Africa at Clearstream, explains: “We see faster growth in Asia than anywhere else and this is why we are focusing on this region. Clearstream has been present in Asia since 1989 and we established our regional hub in Singapore in 2009. Clearstream is part of the Deutsche Börse Group and they are now leveraging Clearstream’s longstanding presence and experience in the region to add some clearing capabilities to their service suite in Asia. The Deutsche Börse Group already deals with more than 350 financial institutions and over 28 central banks in Asia.”
Following the financial crisis, new regulation was put into place and more is expected going forward. One of the major consequences of these changes is the increased need for collateral to satisfy the coverage of financial exposures. These regulatory changes have also increased the need for collateral in Asia. Many opinions have been voiced on whether or not there is enough collateral to meet the high demand. While it may be difficult to draw a definite conclusion, there is now a general consensus in the market that the main issue to be tackled is collateral fragmentation.
Such fragmentation is caused by a variety of legal, regulatory and business factors. The challenge is to find solutions to overcome this fragmentation, which Clearstream is confident to have found in the creation of smart partnerships around the globe that are built on existing local relationships and account structures.
“The challenge facing the global financial services industry is to optimise collateral or liquidity management on a global scale without creating a new systemic risk,” says Bettahar. “To achieve those twin objectives, banks and broker-dealers and their buy-side clients have to be able to use collateral everywhere to collateralise their exposures anywhere.”
Liquidity Hub Connect: partnering with local custodian banks
Clearstream offers tailor-made solutions for different client groups under the Global Liquidity Hub, which is an automated triparty collateral management solution for assets held in custodian banks. The service enables mutual customers to cover exposures in a fully automated way. Thanks to these partnerships, mutual customers benefit from the full suite of collateral management services under Clearstream’s Global Liquidity Hub, while at the same time continuing to benefit from their own choice of local custody services provider.
This service is, for example, offered jointly with Standard Chartered for the Singaporean market. Whereas these assets previously needed to be transferred to Clearstream’s network agent bank for triparty purposes, they can now remain with Standard Chartered and still be automatically included as part of a client’s collateral pool at the Global Liquidity Hub.
Unlike other models, Liquidity Hub Connect allocates collateral in real time and on a just in time basis. This allows Standard Chartered’s customers to optimise their use of collateral without putting their domestic trading and financing activities at risk.
Bettahar says: “Assets are automatically returned to the customer’s settlement account at their local custodian as soon as they are no longer needed by Clearstream for triparty purposes or if they are required to satisfy local settlement obligations. This setup avoids collateral fragmentation and ensures that customers always have a clear overview of all available collateral in each location.”
“More importantly, it also avoids the need to maintain expensive collateral buffers at different providers. As a result, customers are able to make optimal use of their assets held at all Liquidity Hub Connect venues for triparty transactions managed within the Global Liquidity Hub.”
Next to Standard Charted Bank, Clearstream also offers this partnership solution with BNP Paribas Securities Services and Citibank, and a letter of intent has been signed with Deutsche Bank.
“Clearstream’s main Asian hub is in Singapore but we also have an office in Hong Kong and of course we also offer services for other Asian markets,” says Bettahar. “For example, Clearstream has recently announced a partnership with Sumitomo Mitsui Banking Corporation (SMBC), which will pave the way for the seamless mobilisation of Japanese government bonds (JGB) held under local custody in the Global Liquidity Hub.”
“Mutual customers will be able to consolidate their JGBs to cover global exposures from a single collateral pool. They will then be automatically allocated to cover triparty exposures in Clearstream in real-time and only up to the required amount.”
Liquidity Hub GO: partnering with market infrastructures
Clearstream offers numerous partnership models. While it caters to local custodians under Liquidity Hub Connect, another collateral management solution is targeted at market infrastructures. Due to the increased importance of collateral management since the global financial crisis, more and more infrastructure providers have been approached by their customers to provide collateral agent services.
In 2009, the Brazilian CSD Cetip launched a process for the implementation of a domestic triparty collateral management system. The aim was collateralised OTC derivative transactions with domestic Brazilian securities. Cetip selected Clearstream’s unique Liquidity Hub GO solution, which was flexible enough to be customised to Cetip’s specific needs as a white-labelled solution, including a customer front-end in Brazilian Portuguese. The service has been offered by Cetip to the Brazilian market as Cetip|Colateral since 2011.
The advanced scope of Liquidity Hub GO, the short time-to-market (12 to 18 months after signing the project agreement) and low cost compared to an in-house solution built from scratch, convinced more partners in the following years: Iberclear/Spain, ASX/Australia and Strate/South Africa have already launched the solution for their markets. In the meantime, further markets have announced their intention of following the same path.
Bettahar comments: “Following a successful implementation with ASX, Liquidity Hub GO will be leveraged for the second time in the Asian Pacific region. SGX and Clearstream are partnering to introduce an innovative collateral management solution for Singapore. SGX will use Clearstream’s technology on a white-labelled basis to manage its domestic clients’ collateral in the home market. The collateral assets of SGX clients will be serviced locally, without any transfer of assets to an account of Luxembourg-based Clearstream—a model that prevents the creation of systemic risk.”
Such risk is inherent to other alternative collateral management setups. Today, in the Asia Pacific region, institutional asset owners would typically have to transfer the securities that are intended for use as collateral out of their local accounts. But with this transfer, the asset (collateral) holders would also lose control over them. In the case of a default of a foreign provider, the collateral assets would then be difficult if not impossible to access.
“It is a pre-condition for other service providers in the collateral management space that the collateral sits in their accounts throughout the day so that it can be screened and allocated when needed,” says Bettahar.
“This has been a showstopper for national central banks, regulators and infrastructure providers around the globe when they have looked to enter into cooperation agreements with these providers: they clearly want to avoid a loss of control over their domestic securities infrastructure and the collateral of the underlying customers or, even worse, over their clients, which are the asset owners.”
In the initial phase, SGX will use the Clearstream capabilities for mobilising Singaporean assets as collateral against local counterparty exposures. This will all take place on accounts held with SGX following Singaporean law and regulation. In a future step, Clearstream and SGX want to add international assets held outside of Singapore into the coverage of Singaporean exposures.
Eventually, SGX and Clearstream also want to allow Singaporean clients that have international counterparty exposures outside of Singapore to use their assets held in the jurisdiction to cover these.
Bettahar concludes: “Clearstream has been building a global network of strategic partners that make use of a common technology platform. This partnership approach has been particularly successful in Asia to date and we hope to get many more partners on board in the near future to overcome collateral fragmentation in this growing market.”
Over time, this business segment has grown and now manages more than €600 billion of collateral outstanding and services more than 550 clients, including major central banks and central counterparts around the globe.
Clearstream has a longstanding presence in Asia, so it is only natural to also provide extensive services under the Global Liquidity Hub for this fast-growing market. Clearstream is very well established as a leading post-trade service provider with links to 54 domestic markets worldwide.
Lotfi Bettahar, global securities finance head of the Asia Pacific, Middle East and Africa at Clearstream, explains: “We see faster growth in Asia than anywhere else and this is why we are focusing on this region. Clearstream has been present in Asia since 1989 and we established our regional hub in Singapore in 2009. Clearstream is part of the Deutsche Börse Group and they are now leveraging Clearstream’s longstanding presence and experience in the region to add some clearing capabilities to their service suite in Asia. The Deutsche Börse Group already deals with more than 350 financial institutions and over 28 central banks in Asia.”
Following the financial crisis, new regulation was put into place and more is expected going forward. One of the major consequences of these changes is the increased need for collateral to satisfy the coverage of financial exposures. These regulatory changes have also increased the need for collateral in Asia. Many opinions have been voiced on whether or not there is enough collateral to meet the high demand. While it may be difficult to draw a definite conclusion, there is now a general consensus in the market that the main issue to be tackled is collateral fragmentation.
Such fragmentation is caused by a variety of legal, regulatory and business factors. The challenge is to find solutions to overcome this fragmentation, which Clearstream is confident to have found in the creation of smart partnerships around the globe that are built on existing local relationships and account structures.
“The challenge facing the global financial services industry is to optimise collateral or liquidity management on a global scale without creating a new systemic risk,” says Bettahar. “To achieve those twin objectives, banks and broker-dealers and their buy-side clients have to be able to use collateral everywhere to collateralise their exposures anywhere.”
Liquidity Hub Connect: partnering with local custodian banks
Clearstream offers tailor-made solutions for different client groups under the Global Liquidity Hub, which is an automated triparty collateral management solution for assets held in custodian banks. The service enables mutual customers to cover exposures in a fully automated way. Thanks to these partnerships, mutual customers benefit from the full suite of collateral management services under Clearstream’s Global Liquidity Hub, while at the same time continuing to benefit from their own choice of local custody services provider.
This service is, for example, offered jointly with Standard Chartered for the Singaporean market. Whereas these assets previously needed to be transferred to Clearstream’s network agent bank for triparty purposes, they can now remain with Standard Chartered and still be automatically included as part of a client’s collateral pool at the Global Liquidity Hub.
Unlike other models, Liquidity Hub Connect allocates collateral in real time and on a just in time basis. This allows Standard Chartered’s customers to optimise their use of collateral without putting their domestic trading and financing activities at risk.
Bettahar says: “Assets are automatically returned to the customer’s settlement account at their local custodian as soon as they are no longer needed by Clearstream for triparty purposes or if they are required to satisfy local settlement obligations. This setup avoids collateral fragmentation and ensures that customers always have a clear overview of all available collateral in each location.”
“More importantly, it also avoids the need to maintain expensive collateral buffers at different providers. As a result, customers are able to make optimal use of their assets held at all Liquidity Hub Connect venues for triparty transactions managed within the Global Liquidity Hub.”
Next to Standard Charted Bank, Clearstream also offers this partnership solution with BNP Paribas Securities Services and Citibank, and a letter of intent has been signed with Deutsche Bank.
“Clearstream’s main Asian hub is in Singapore but we also have an office in Hong Kong and of course we also offer services for other Asian markets,” says Bettahar. “For example, Clearstream has recently announced a partnership with Sumitomo Mitsui Banking Corporation (SMBC), which will pave the way for the seamless mobilisation of Japanese government bonds (JGB) held under local custody in the Global Liquidity Hub.”
“Mutual customers will be able to consolidate their JGBs to cover global exposures from a single collateral pool. They will then be automatically allocated to cover triparty exposures in Clearstream in real-time and only up to the required amount.”
Liquidity Hub GO: partnering with market infrastructures
Clearstream offers numerous partnership models. While it caters to local custodians under Liquidity Hub Connect, another collateral management solution is targeted at market infrastructures. Due to the increased importance of collateral management since the global financial crisis, more and more infrastructure providers have been approached by their customers to provide collateral agent services.
In 2009, the Brazilian CSD Cetip launched a process for the implementation of a domestic triparty collateral management system. The aim was collateralised OTC derivative transactions with domestic Brazilian securities. Cetip selected Clearstream’s unique Liquidity Hub GO solution, which was flexible enough to be customised to Cetip’s specific needs as a white-labelled solution, including a customer front-end in Brazilian Portuguese. The service has been offered by Cetip to the Brazilian market as Cetip|Colateral since 2011.
The advanced scope of Liquidity Hub GO, the short time-to-market (12 to 18 months after signing the project agreement) and low cost compared to an in-house solution built from scratch, convinced more partners in the following years: Iberclear/Spain, ASX/Australia and Strate/South Africa have already launched the solution for their markets. In the meantime, further markets have announced their intention of following the same path.
Bettahar comments: “Following a successful implementation with ASX, Liquidity Hub GO will be leveraged for the second time in the Asian Pacific region. SGX and Clearstream are partnering to introduce an innovative collateral management solution for Singapore. SGX will use Clearstream’s technology on a white-labelled basis to manage its domestic clients’ collateral in the home market. The collateral assets of SGX clients will be serviced locally, without any transfer of assets to an account of Luxembourg-based Clearstream—a model that prevents the creation of systemic risk.”
Such risk is inherent to other alternative collateral management setups. Today, in the Asia Pacific region, institutional asset owners would typically have to transfer the securities that are intended for use as collateral out of their local accounts. But with this transfer, the asset (collateral) holders would also lose control over them. In the case of a default of a foreign provider, the collateral assets would then be difficult if not impossible to access.
“It is a pre-condition for other service providers in the collateral management space that the collateral sits in their accounts throughout the day so that it can be screened and allocated when needed,” says Bettahar.
“This has been a showstopper for national central banks, regulators and infrastructure providers around the globe when they have looked to enter into cooperation agreements with these providers: they clearly want to avoid a loss of control over their domestic securities infrastructure and the collateral of the underlying customers or, even worse, over their clients, which are the asset owners.”
In the initial phase, SGX will use the Clearstream capabilities for mobilising Singaporean assets as collateral against local counterparty exposures. This will all take place on accounts held with SGX following Singaporean law and regulation. In a future step, Clearstream and SGX want to add international assets held outside of Singapore into the coverage of Singaporean exposures.
Eventually, SGX and Clearstream also want to allow Singaporean clients that have international counterparty exposures outside of Singapore to use their assets held in the jurisdiction to cover these.
Bettahar concludes: “Clearstream has been building a global network of strategic partners that make use of a common technology platform. This partnership approach has been particularly successful in Asia to date and we hope to get many more partners on board in the near future to overcome collateral fragmentation in this growing market.”
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