Five financial market infrastructures from different parts of the world have joined forces to create the Liquidity Alliance, a forum to exchange information, identify common needs and extend global collateral solutions.
The founders are the Australian Securities Exchange (ASX), Cetip in Brazil, Clearstream in Germany and Luxembourg, Spain’s Iberclear and Strate, the South African central clearing depository (CSD).
According to the founding group, the implementation of new laws to reduce systemic risk, notably in derivatives trading, will leave the financial services industry short of liquidity and collateral at a time when new capital rules are making banks unwilling to lend. April 2012 estimates by the Basel Committee on Banking Supervision suggest banks in Europe alone are facing an aggregate shortfall of stable funding of EUR 2.78 trillion in fulfilling the additional liquidity requirements of Basel III. Additionally, the International Monetary Fund reported in April 2012 that sovereign downgrades would reduce the supply of general collateral by USD 9 trillion by 2016.
The founders of the Liquidity Alliance see CSDs and related financial infrastructures as well-positioned to provide solutions to the global collateral shortage through optimisation of collateral pools. The group says it is open to wider membership and has held discussions with around 10 other market infrastructures to this effect.
Liquidity Alliance aims to support faster and more efficient movement of collateral by CSDs’ clients by facilitating more efficient exchange of information between members rather than centralising collateral by account transfer. Discussions with regulators are reported to have been positive.
The five initial members will also support the development of informed research, which will be promoted as a neutral source of pan-industry information, ideas and opinions.
“Different markets have different needs and a truly global liquidity management solution needs to factor in these differences while still catering to the globally operating banks,” said Peter Hiom, deputy CEO, ASX Group. “It is our objective that the Liquidity Alliance will deliver an efficient value proposition for the worldwide industry enriched by local know-how and experience.”
In Europe, the advent of TARGET2-Securities will change the landscape for infrastructures and will lead to more competition in the collateral management space. “Working in association with other global infrastructures will ensure we can maximise our offer to our customers in an efficient and cost-effective way,” said Jesús Benito, CEO, Iberclear.
The technological underpinnings of the Liquidity Alliance will be provided by Clearstream. “Clearstream is delighted to be able to bring its world-leading collateral management technology to the Liquidity Alliance and so benefit its partners and their customers,” said Stefan Lepp, CEO, Clearstream Banking. “Optimising collateral means creating and utilising the widest possible collateral pools without jeopardising individual and country specific requirements and the Liquidity Alliance is a major step in delivering a truly global liquidity and collateral pool.”
In a further initiative to enhance collateral management efficiency, Clearstream has agreed to work with Belfius, the Belgian state-owned retail banking and insurance group grown out of Dexia Bank Belgium, to develop a new collateral management facility for bilateral trades, focusing on over-the-counter (OTC) derivatives. The partners expect the service, which will be white-labelled by Clearstream and offered to its clients, to be launched in 2013 following the signature of a Letter of Intent.
The partnership with Belfius will enable Clearstream customers to optimise collateral management across cleared and uncleared OTC derivative trades, thereby reducing collateral fragmentation. Clearstream will be targeting mid-sized banks and buy-side customers in particular and will offer margin calls, dispute management, portfolio reconciliation, legal contract review and administration, payments and settlements reporting, a cash reinvestment mechanism and collateral transformation.
Clearstream’s Lepp said the OTC collateral management service would complement Clearstream’s existing service offering, including its Global Liquidity Hub. “Collateral management is a priority right across our industry,” he said. “With this service, we are able to address the growing pressure triggered by regulatory changes in the OTC derivatives world on a short-time-to-market basis. Forging strategic partnerships with key industry players is an important part of Clearstream’s business model.”
Reporting by Richard Schwartz