SIX Securities Services, the post-trade arm of the SIX Group, will launch a new collateral optimisation service to help clients mobilise collateral in response to regulatory reform of the OTC derivatives markets.
CEO Thomas Zeeb said the service would pool a number of collateral management tools currently offered by SIX to let buy- and sell-side firms move collateral across market infrastructures to avoid wastage.
SIX will take on a virtual collateral management role to optimise collateral on behalf of clients. While no fixed dates are set, the service may be ready to formally go live in H1 2015.
“We’ll show clients a consolidated view of their collateral across multiple infrastructures and will instruct collateral movements accordingly between collateral locations,” Zeeb said.
The new service responds to the need of market participants to supply collateral in disparate infrastructures to support trading and avoid concentration risk, but avoid an oversupply in certain infrastructures.
“We recognise that clients do not necessarily want to hold all of their collateral in one place. Collateral held in a final place of settlement or central securities depositary (CSD) is more likely to be fragmented across markets, even if it is an extremely safe place to hold assets,” he said.
The European market infrastructure regulation and the US Dodd-Frank Act have pushed financial markets into an era of greater collateralisation. In particular, the need to centrally clear OTC derivatives trades under these two regulatory regimes is expected to increase appetite for high-quality collateral.
Key industry figures, including Zeeb himself, have warned the market may turn to lower-quality collateral to meet this growing demand.
A survey conducted by SIX Securities Services released in July showed 35% of 60 UK buy- and sell-side firms said it is “acceptable” for collateral to be low quality, complex and opaque, so long as it’s cheap.
“This is a very worrying development and if we go that far we haven’t learned any lessons from 2008. That doesn’t mean junk bonds, but there appears to be a tendency again to create structured products to generate more collateral, and not all of these are fully understood from a valuation point of view,” he said.
SIX Securities Services operates a pan-European CSD and central counterparty (CCP) for equities. The SIX Group also operates the Swiss national stock exchange, and in May will purchase Norwegian CCP Oslo Clearing, which OTC derivatives clearing capabilities.
SIX Security Services’ new collateral optimisation offering will compete with services from international CSD Euroclear, which last year launched its Collateral Highway service, and Deutsche Börse-owned Clearstream, with its Liquidity Hub.
The full interview with Thomas Zeeb will feature in the Q3 edition of The TRADE Derivatives magazine, which will be published in September.