New Fixed Income Post-Trade Emerges

Shanny Basar

Increased electronic trading in fixed income is leading to the development of new liquidity and collateral management products as TARGET2-Securities, the platform for harmonizing cross-border securities settlements in the Eurozone, is also reshaping post-trade operations.

Celent analysts Joséphine de Chazournes and Arin Ray said in a report, European Post-Trade Infrastructure Evolution: Switching Gears for the Long Run, that increasing electronification of fixed income, due to regulatory changes,  has led to a new infrastructure being developed. Exchanges are trying to get a foothold in fixed income and over-the-counter trading is moving to regulated platforms leading to a mushrooming of new venues.
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“We are currently seeing a new breed of money market and fixed income solutions being developed to enhance liquidity and collateral management: 360T with Clearstream, Elixium with Tradition and Euroclear, DBVX with BoNY,” said Celent.

In addiction in March this year, a European Central Bank advisory group proposed a new centralized issuance service for the ECB to facilitate debt issuance of highly rated securities and collateral by Eurozone sovereign and supranational issuers. Central securities depositories would have direct access to the centralized service and remain custodians of the securities but issuers would have pan-European investor reach and asset servicing.

Josephine de Chazourne, Celent

“This could be extended to even some other pan-European issuance such as euro- denominated Eurobonds that are not issued by corporates (banks), which represent roughly 50% of Eurobond volumes, i.e., €5 trillion, and in the long run be extended to all Euro denominated sovereign bonds and corporates to increase standardization of issuance and enable more cost reduction and more liquidity,” said Celent. “There are questions around the ECB’s authority to extend into this issuance within the EU Union Treaties; if successful this new issuance project has the potential for significant transformation and disruption in the longer term.”

In addition, the European post-trade market is being reshaped by T2S, with around 90% of T2S eligible volumes on the platform since the successful migration of the fourth wave at the beginning of this year.

“The stability of the system has been ensured paving the way for realizing its long term benefits,” added the report.

T2S allows settlement in central bank money across borders, central securities depositories and currencies so there is no difference between domestic and cross-border transactions. In T2S participants can use one cash and securities account for all T2S markets, which now have the same cut off times, allowing liquidity and collateral to be pooled. The settlement platform began operating in 2015 after being launched by the European Central Bank in 2008 to end fragmentation in securities settlement across the Eurozone as the cost of cross-border transactions could be 10 times more expensive than domestic transactions.

Celent continued that T2S offers participants easy view of aggregate holdings, superior netting and faster mobilization collateral across different venues, by consolidating securities into a single pool. Securities are no longer held at numerous siloed national CSDs restricting their movement.

“Authorities would like to leverage the fact that T2S is now live, and the entry into force of Central Securities Depositories Regulation to set up a Eurosystem market infrastructure project, on whether to launch a Euro Collateral Management System,” said Celent. “Ideally it would decrease or eliminate the difference between domestic and cross-border collateral mobilization by enabling Eurosystem counterparties to use and consolidate activity in T2S, and it would streamline Eurosystem collateral management procedures.”

Celent continued that technology is also promising to be a major disruptor of markets and market practices and pointed to artificial intelligence, machine learning, and robotic process automation in addition to distributed ledger technology.

“If centralized ledger projects fail to gain traction, these players could move towards interconnected bots that are able to reconcile data between entities just by talking to each other (a new SWIFT?),” said Celent. “We could also foresee custodians testing machine learning algorithms that can learn and quickly incorporate the ins and outs of all the local laws and tax systems to be able to provide seamless pan-European asset servicing.”

The analysts also expect traditional data and technology providers to enter or expand into post-trade, especially in clearing, margining, and collateral processes.

“It is very likely that, in such endeavors, we will increasingly see interesting partnerships developing between banks and fintech providers, following the trends we see in other parts of financial services segment,”added the report.

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