Re-using buy-side collateral key to new offering

A new OTC derivatives service from Clearstream and Commerzbank blends collateral management for centrally cleared and bilateral transactions to maximise buy-side resources in meeting new collateral rules.

A new OTC derivatives service from Clearstream and Commerzbank blends collateral management for centrally cleared and bilateral transactions to maximise buy-side resources in meeting new collateral rules.

The TradeCycle service announced this week by Deutsche Börse-owned international central securities depositary (ICSD) Clearstream and Commerzbank will reduce inefficiencies in adapting to the regulatory-driven need to centrally clear OTC derivatives trades.

Stefan Lepp, member of the executive board and head of global securities financing at Clearstream, told the service would help the buy-side adapt to an era of highly collateral-dependent trading activity, key to which is the ability to maximise collateral.

“Based on the legal framework, clients will be able to re-use their collateral received through uncleared, bilateral position margining to meet their central counterparty (CCP) requirements either through bilateral or tri-party collateral management services,” Lepp said, adding that enhanced settlement monitoring and reporting of collateral would also contribute to the efficient use of collateral pools.

G20-led rules requiring firms to centrally clear OTC derivatives transactions will come into effect in January under the European market infrastructure regulation (EMIR). In the US, buy- and sell-side firms have already adapted to similar clearing rules under the Dodd-Frank Act.

TradeCycle will let clients access integrated management solutions for trading, clearing, settlement and custody, including advisory, valuation and collateral management and will go live in Q4.

“As market players are looking into trading positions more and more on a collateralised basis, streamlined collateral management operations will enable TradeCycle clients to interact with new counterparts, leading to a larger pool of counterparties to execute trades,” Lepp said.

Lepp added the service would meet the needs of market participants still managing margin requirements through closed-off silos, with limited interaction between departments.

“This situation leads to higher core capital costs due to the lack of constant collateral optimisation, operational risks and higher processing costs,” he said. “Depending on the client’s preference and location of the underlying collateral, TradeCycle enables the clients to locate, evaluate and leverage their positions through straight-though-processing in the back-office.”

Nicholas Giesbert, divisional board member for fixed income and securities at Commerzbank Corporates and Markets, added that asset managers would look to services like TradeCycle to integrate OTC derivatives trading services and reduce costs.

“Clients benefit from having a single on-boarding process across all services they select, thereby lowering their implementation and maintenance costs for each bespoke solution,” he said.

Asides from reducing their IT by outsourcing the middle- and back-office collateral management functions, institutional investors will benefit from lower collateral financing charges by concentrating activity in one system.

“TradeCycle’s access to instruments is designed to lower funding costs and to raise yield on assets held in their custody accounts, and we believe a yield enhancement of approximately 8-12 basis points annually is possible,” Giesbert said.

He added the service would be compatible with the introduction of mandatory trading of OTC derivatives on organised trading facilities that will be included in Europe-wide markets rules under MiFID II.

Competition between firms offering collateral services will intensify in the region as EMIR’s mandatory central clearing requirements approach.

This week, a collateral optimisation service from Clearstream competitor and fellow ICSD Euroclear Bank, the Collateral Highway, welcomed the first Middle Eastern CCP.

The Dubai Commodities Clearing Corporation guarantees all trades executed on the Dubai Gold & Commodities Exchange and the link means clients of both will be able to use CCP-eligible securities accessible via the Collateral Highway to fulfill initial and variation margin requirements.