New rules mandating stronger collateral requirements for financial firms, particularly in the derivatives space, have created a challenging landscape for the efficient allocation and mobilization of capital across the globe.
Responding to this industry need, The Depository Trust & Clearing Corporation (DTCC) and Euroclear formed DTCC-Euroclear Global Collateral Ltd., a joint venture (JV) agreement to deliver new, innovative processing solutions that will increase efficiency and reduce risk and costs within the highly-fragmented, complex collateral management ecosystem.
Ted Leveroni, DTCC-Euroclear Chief Commercial Officer, sat down with DTCC Connection to discuss the dynamics component of this dynamic market environment.
DC: What are the top challenges in the collateral management landscape?
TL: More than ever before, the industry is being challenged by the unprecedented number of regulations that are being implemented globally. Simply keeping track of all the new regulations, their implementation dates and their intended impacts requires firms to devote dedicated resources to these tasks. However, identifying the unintended consequences of these regulations considered in aggregate is an even greater challenge. Many firms are global and have extremely complex business and operational models putting each firm in a somewhat unique position when determining how to address both overall implications of these global rules.
DC: How will new rules on collateral requirements impact firms?
TL: One of the most significant impacts to firms from the new rules on collateral will be how to handle the significant increase in collateral call volume. Global regulations mandating swap clearing, collateralization of non-cleared derivatives and implementation of Basel III will all have an effect on the number of collateral calls that must be processed. Many firms will need to re-engineer portions of, if not, their entire collateral management process to create the automated, transparent operational environment required to ensure their counterparty risk is properly managed in a more timely fashion– same day and even intraday in some instances. Firms should act now to engage with service providers, industry infrastructure and other parties that can offer help in them in eliminate (or minimize) the likelihood of missed calls, failed collateral movement and greater overall risk to their businesses.
DC: What were the key marketplace drivers that led to the creation of DTCC-Euroclear Global Collateral Ltd.?
TL: Both DTCC and Euroclear have recognized the value that industry infrastructure operators can deliver in creating global, community-based solutions to address growing needs in collateral management. However, the collateral lifecycle is a long one which spans touch-points between multiple parties – the buy side, the sell side, clearing brokers, CCPs and custodians, just to name a few. While, DTCC’s Margin Transit Utility (MTU) and Euroclear’s Collateral Management Utility (CMU) each create value on their own, combined they provide our collective clients with significant synergies and create a much broader solution that can span all those touch-points. What is truly encouraging is that as we move forward with this alliance, we are finding new synergies with the products that were not originally anticipated, allowing us to offer an even more robust and flexible solution.
DC: The financial industry is increasingly turning to market infrastructures to deliver strategic collaborative solutions to address challenges in a more holistic manner. How will the DTCC-Euroclear collaboration address the key challenges facing the collateral management landscape?
TL: DTCC-Euroclear Global Collateral Ltd. will offer flexible solutions in both the derivatives and financing collateral spaces. Leveraging other market infrastructures such as ALERT, SWIFT, and Acadiasoft these solutions will create transparency, mobility, efficiency and security in the collateral space by automating what is currently a manual process for the industry. We will enable firms to view their collateral movements, settlements and available pools globally on a real time or near real time basis. We will automate the allocations and movements of their collateral across boarders and regions allowing the more efficient use of, the collateral they have on hand. Furthermore, we will provide these solutions on from the DTCC and Euroclear backbones, which are excellent in terms of technical security. At the end of the day these solutions will mitigate many of the challenges that will come with the new regulatory environment.
News release: DTCC and Euroclear Create Collateral Processing Joint Venture
Byline article: Collateral Challenges Demand Collaborative Solutions
DTCC White Paper: Trends, Risks and Opportunities in Collateral Management