Tradition to Launch Collateral Venue

Terry Flanagan

Tradition, the inter-dealer broker, is launching a European trading platform for collateral and secured deposits as new regulations have forced businesses to reconsider their funding models.

DBV-X, the new regulated multi-lateral trading facility, is slated to go live in the fourth quarter of this year. The platform is open to corporations, asset managers, pension funds, insurance companies, hedge funds, brokers, dealers and banks.

Increased capital requirements have forced banks to reconsider how they participate in funding and collateral markets and the financial crisis has led a shift away from unsecured collateral to secured deposits.

John Wilson, managing director, Tradition and head of DBV-X, told Markets Media: “Corporations want to find secured short-dated deposits but some banks have said they will charge for taking deposits. For the first time, pension funds are looking at increasing leverage to tackle pension fund deficits and want to repo their bonds.”

All DBV-X participants just have to sign a single standard legal agreement to join the platform and have full control over the products and counterparties they use.

“The platform enhances relationships and encourages firms to encourage their peer group to join. Members can tailor, expand and diversify their network very easily,” said Wilson.

He added that clients will effectively build their own micromarket. For example, banks may decide to put all their relationships on the platform or a group of asset managers may decide they want to trade with each other.

“We can allow pre-trade anonymity because our platform has embedded risk limits,” added Wilson. “Trades are only allowed if they are with someone they want to trade with and within their available limits.”

The platform will also offer price transparency as members will be able to view total market liquidity at every price point as well as the liquidity they can access at each price point given their credit limit filters, allowing them to make comparison and measure the impact of limits on depth and price. “Our trades are valued post-haircut at standard clip sizes so clients can easily compare different kinds of collateral,” said Wilson,

Market participants are able to trade automatically within their risk limits to access a wide range of standardised liquid general collateral “baskets”, which include a range of eligible assets including government and corporate bonds. Customers will be able to invest/raise cash against collateral (“repo”), perform collateral upgrades or generate additional yield according to their individual investment, funding and margin requirements.

DBV-X will partner with at least one central counterparty so trades can either be cleared or is free to join and is open to corporates, asset managers, pension funds, insurance companies, hedge funds, brokers, dealers and banks. Using standardised products and processes, these firms will have access to a range of maturities, currencies and collateral options, with a choice of tri-party or CCP cleared trades.

Euroclear will be DVB-X’s tri-party agent in Europe, independently holding the assets involved in the repo. Jo Van de Velde, head of product management at Euroclear, said in a statement: “By connecting with Euroclear’s Collateral Highway, DBV-X’s clients will have fast, efficient and open access to a growing community of counterparties and an ever growing pool of collateral and deposits for trading, margin and funding requirements.”

The central securities depositary is developing collateral baskets for DVB-X that may also include equities.

“We have had an overwhelmingly positive response from the market,” added Wilson. “They recognise that we are trying to solve a structural problem which has forced people to reevaluate their business models. Our goal is to make things all together easier.”

An audience survey at Euroclear’s 14th annual Collateral Conference held in Brussels this week found that corporate treasurers remain a small part of the repo market despite their increasing surplus liquidity. In the poll 53% of delegates think that cash coming from corporate treasuries remains just a small fraction of liquidity and 54% said corporates will not play a much greater role by 2018 when the new regulations are implemented.

The treasurers on the Cost of Cash panel agreed greater standardisation of documentation and onboarding among banks will make repo more interesting to corporates and so will greater pricing transparency. One panel member said: “We don’t want to have to call all five of our banks to get prices.”

Collateral mobility was a top concern for the greatest number of respondents, 35%, in research report from consultancy Aite Group which was commissioned by Euroclear.

The report found that stronger and more numerous relationships among triparty repo participants will be key in the coming years, with related activity between European firms and non-European counterparties doubling from 17.5% in 2001 to 34% in December 2014.

The study said: “70% of respondents consider collateral transformation (where one type of collateral is substituted for another via a series of repo or securities lending arrangements) to be high on their agenda.”

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