A new service from the French arm of central securities depository (CSD) Euroclear will help the buy-side post collateral to support OTC derivatives trading, but a leading bank has stressed that sell-side expertise should not be ignored.
has warned that the downgrading of sovereign debt poses challenges to the risk
management capabilities of central counterparties as they become familiar with handling
a wider range of instruments.
skill set required to manage those risks isn’t typically found in the treasury
functions of a CCP,” said Michelle Neal, global head of fixed income electronic
markets, futures and options and OTC derivative clearing at Nomura.
Euroclear France is the latest to develop
its buy-side offering, by acting as a central provider for the management of
collateral against cleared transactions.
CSD has announced plans to extend a tri-party repo collateral management
service it launched last year. The service will automate the processing of
collateral transfers associated with interbank repos and other securities
financing transactions using securities held in the French CSD as collateral.
broader service will be launched in June and is being developed with
Anglo-French clearing house LCH.Clearnet, acquired last week by the London
Stock Exchange, which will provide the clearing, netting and guarantee services
and use Euroclear France to identify and allocate the necessary collateral.
scheme, which was initially developed in conjunction with Banque de France,
allowing the central bank to collateralise exposures arising from domestic
credit operations, will now include the rest of the French banking community.
CSD said it also planned to extend the service to the Euroclear Settlement
of Euronext-zone Securities Community, which will let repo transactions
across Belgium, the Netherlands and France be supported by the same
collateral management system and procedures.
collateral solutions continue to emerge, Nomura has warned that issues related
to how much high-quality, liquid collateral is available for clearing have been
largely overlooked and could create funding issues for institutions looking to
meet collateral requirements. A recent paper from research Finadium also looks at whether corporate bonds with less than a AA rating and some equities will be able to fulfil collateral needs.
is recognition that banks provide collateral services and funding solutions to
clients as part of an overall relationship,” said Neal.”[Banks] are probably
best suited to facilitate the transformation of ineligible collateral into
report from investment banking consultancy Rule Financial which reviewed bank and dealer preparation for the Dodd-Frank Act, noted 90% of
sell-side firms either already offer collateral transformation services or plan
to develop them within the next 12 months. The burgeoning collateral swaps
market, where buy-side firms lend gilts and
other high-quality assets to banks in exchange
for a lending fee and other types of corporate bonds, is also emerging as a channel for buy- and sell-side firms to manage their new collateral obligations.
number of sovereign downgrades over the last year have meant many
associated fixed income products will no longer be suitable as the high-grade
collateral required to meet clearing obligations under the new OTC derivatives
to Neal, if such factors cause clearing houses to move down the credit
spectrum, in terms of the collateral they are willing to accept, “it
fundamentally makes for a more risky environment”.