Canada Eyes Collateral Management With Clearstream

Terry Flanagan

With the global financial markets under increasing regulatory pressure and scrutiny, collateral management services have risen to become a key facet of the post-trade process.

“Collateral management was a back-office topic for a long time, but due to the wave of regulations—Basel III, EMIR, Dodd-Frank and many more—it is now being discussed at board level across all financial and non-financial institutions,” Stefan Lepp, Clearstream Banking chief executive and head of Global Securities Financing, told Markets Media.

“Market participants have the choice to either develop such collateral management facilities standalone—which has been identified as extremely complex and time consuming—or to turn to a provider that can help them in these needs. In this respect, our strategic partnership approach enabling infrastructure providers to take on such a development on behalf of market participants sees more and more traction.”

Canada’s CDS Clearing recently announced an agreement to use Clearstream’s Liquidity Hub GO (Global Outsourcing). The companies are currently in exclusive talks to develop a tri-party collateral management service for Canada, which will allow CDS clients to use collateral more effectively.

“In Canada, [collateral management] is extremely important,” Curtis Wennberg, chief business development officer at CDS, told Markets Media. We see the demand in the future for collateral to be much greater than it is today.

Every market, including Canada, recognizes this shift which is being driven by regulatory change stemming from the 2008 credit crisis. The Canadian banking system emerged through the credit crisis very well and is highly regarded, but is not isolated from the regulatory changes and needs to prepare. We believe that global collateral management is one of the top areas of concern with broker-dealers today.”

While the agreement has been signed, final implementation can often take as long as a year before it becomes operational.

“The timeline for implementation depends on external factors that we cannot predict at this stage,” said Lepp of Clearstream. “However, the Liquidity Hub GO service is up and running in Brazil and it took 12 months between the signing of the binding agreement and the final launch on July 18, 2011.”

The collateral management process calculates and manages the amount of collateral that participants have to post as a guarantee of a trade. It has become key for financial institutions given the increasing pressure of Basel III capital adequacy and liquidity requirements for banks. Following the high profile collapses of Lehman Brothers and MF Global, regulatory scrutiny has jumped.

Canada is just the latest country to partner with Clearstream to provide collateral management services. It follows a partnership formed in January when Clearstream and Strate, the South African central securities depository, signed a letter of intent to develop a new collateral management service whereby the local South African market will essentially outsource the process.

The company is also in the process of forming collateral management agreements with several other markets around the world. Its first partnership was with Brazilian central securities depository Cetip. As part of the agreement, Cetip outsourced its collateral management obligations to Clearstream. The company asserts that it is the only collateral management services provider in a position to manage collateral across time zones and regions while the assets stay in the respective domestic market, under local legislation, which is a regulatory requirement in many countries.

Clearstream Banking is the clearing and settlement division of Deutsche Börse, and is based in Luxembourg. The company was founded in 2000 through the merger of Cedel International and Deutsche Börse Clearing. Its international central securities depository operations are based in Luxembourg. It also acts as the central securities depository for Germany.

Clearstream announced in August that it had entered into negotiations with the Australian Securities Exchange to develop a new collateral management service for the Australian market. While that has not yet gone live, it remains on track.

“We are on track with all initiatives so far,” said Lepp. “This is the case due to the fact that collateral management is a high priority across markets and all our strategic partners have given these initiatives sufficient resources to stay in line with agreed timelines. As mentioned before, we have been able to go live with the first market [Brazil] and we are now already working on the implementation of phase two which will combine domestic collateral [held at the local CSD] with international collateral [held at Clearstream].”

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