Clients of Citi can now benefit from better collateral efficiencies following deals the investment bank has struck with international central securities depositories (ICSDs) Clearstream and Euroclear.
The agreements will help Citi clients manage the shortfall of collateral that is anticipated following the introduction of legislation that requires the central clearing and on-exchange trading of OTC derivatives. The rules will oblige those trading swaps to post a greater amount of margin to CCPs than previously required under informal, bilateral arrangements.
"Against the backdrop of increased risks related to counterparty exposure and the impending global collateral squeeze, this new offering further demonstrates Citi's commitment to developing open architecture solutions which allow our clients to more efficiently access liquidity pools," said Sanjiv Sawhney, EMEA head of securities and fund services at Citi. "This service improves collateral optimisation across all asset classes and markets by leveraging the breadth of Citi's direct custody and clearing network that spans over 60 markets."
Euroclear Bank - which holds up to €23 trillion worth of collateral - will enter into tri-party collateral arrangements so assets held at Citi for mutual clients can be used as collateral via the tri-party services offered by the ICSD, providing collateral flexibility and optimisation.
The agreements mean equity and fixed income positions held in Citi's custody network can be used as collateral when Euroclear Bank serves as the tri-party agent and manages collateralisation. Euroclear has stated that use of its tri-party collateral management services has grown by 30% this year.
Citi will continue to hold the assets as custodian, while the securities move across markets and time zones via Euroclear's Collateral Highway.
"The joint initiative is a significant market development, with the aim of delivering meaningful client benefits at a time when collateral is in greater demand than ever. Together, Citi and Euroclear Bank will help our clients better manage counterparty exposures, ease access to liquidity and make more effective use of their assets as collateral, while alleviating the challenges of collateral fragmentation," said Frederic Hannequart, chairman of Euroclear Bank.
Hannequart suggested in a recent article that collaboration between market infrastructure providers would be crucial in tackling the collateral crunch.
Meanwhile, Clearstream is working on extending its Liquidity Hub Connect service to Citi clients, letting them cover the collateral needed for global exposures through a single collateral pool. Citi customers will be able to retain their asset portfolios within the bank's custody network, leaving collateral management functions like substitution and optimisation in the hands of Clearstream.
The ICSD added its Liquidity Hub Connect service helps to mobilise collateral in real time and only up to the amount required.
"Liquidity Hub Connect will enable Citi to offer its customers the unique advantages of our collateral management services, which are widely acknowledged as the best in the industry and which continue to develop," said Clearstream CEO Jeffrey Tessler. "We've been in the fast lane with these services for a number of years now and the open architecture of the Global Liquidity Hub means our collateral pool continues to broaden and deepen, while we continue to deliver collateral management services that are exceptionally user-friendly, and live."
Clearstream is also cooperating with multi-bank, multi-asset trading platform provider 360T Trading Networks on a separate tri-party repo service that will facilitate the repo administration process for eligible collateral baskets.