[ M A R K E T R E V I E W | T 2 S ]
market, providing a single access point for all T2S markets in central bank money and its ICSD in Luxembourg. The aim for the new model is to remove the barriers to the movement of securities and collateral across Europe. According to Phil Brown, co-CEO of Clearstream Banking, the model will operationally blend both central bank and commercial money, and therefore combine domestic and international liquidity into a single access point.“ The new T2S Investor CSD model allows our clients to take automatic mobilisation of collateral to the next level,” says Brown.“ Clients are now able to manage their entire collateral pool across Clearstream’ s CSD and ICSD. This results in an optimised use of collateral across locations as well as enhanced liquidity management.”“ This step brings the first real cross-border volume onto the T2S platform – finally making the ECB’ s vision of a harmonised pan-European settlement landscape a reality.” The new model is already live for the Belgian, Dutch, French, Italian and Luxembourgish markets, with others follow on a country-by-country basis. Unsurprisingly, Euroclear is also developing a similar structure to enable banks
to use assets held within T2S to finance their positions outside of the Eurozone. Olivier Grimonpont, global head of collateral management and securities financing for Euroclear, believes banks and collateral managers should not be held back in settling their collateral in only one operating environment.“ Your custody location determines your settlement location,” he explains.“ With dealers willing to benefit from T2S, we will see more and more demand to settle collateral management operations in central bank money in T2S.“ However, your choice should not limit your ability to finance your assets with a counterparty that has made the same custody decision.“ It is important that the collateral manager offers the possibility to cross-settle between the T2S world, settling in central
bank money, and the ICSD world settling in commercial bank money.“ Several clients will most likely opt for a mixed model, keeping different custody locations for different asset classes, and it is therefore paramount that the tri-party agent offers pooling solution to those clients, enabling them to mobilise assets from different locations into one transaction and to allocate them to the counterparty’ s preferred custody location.”
Tri-party’ s growing importance T2S has also spurred the use of tri-party agents, largely influenced by tri-party securities lending where there has been an increase in demand for non-cash collateral and collateral transformation.
“ It is important that the collateral manager offers the possibility to cross-settle between the T2S world, settling in central bank money, and the ICSD world settling in commercial bank money.”
“ Over the past couple of years HQLA have been more in demand, but circulation of those assets as collateral has not been as fluid as it could be.”
OLIVIER GRIMONPONT, GLOBAL HEAD OF COLLATERAL MANAGEMENT AND SECURITIES FINANCING, EUROCLEAR
MICHAEL ALBANESE, GLOBAL HEAD OF COLLATERAL MANAGEMENT, JP MORGAN
The quantitative easing( QE) programme of the ECB and other central banks has further increased demand for tri-party collateral management services. Banks and dealers are viewing the tri-party market as a way to manage their collateral inventories however, certain difficulties remain to achieve efficiencies within T2S. HSBC’ s Moran believes encouraging tri-party interoperability will significantly enhance these processes.“ To fully support these goals, tri-party agent standardisation, including messaging, valuations, product classifications and multi-product functionality is necessary,” adds Moran. But to achieve this is no easy task for a tri-party agent. Euroclear’ s Grimonpont argues that while clients want the ability to optimise collateral allocations, tri-party agents are less inclined given the complexity involved.“ Clients want the ability to optimise the allocation of collateral, and the complexity of optimising across counterparties, asset classes, collateral service providers and to link it to regulatory requirements of each individual bank, makes it increasingly meaningless for a tri-party agent to try to optimise collateral,” explains Grimonpont.“ Rather, dealers want the tri-party agent to use their own optimisation as a guide for the tri-party agent to allocate the optimal assets in each individual transaction. Dealers increasingly need a system that provides more tailor-made services allowing them to have better control of their collateral processes and real-time reporting to enable optimal use of their inventory.’’ T2S will also have to allow a greater range of asset classes and securities to be transacted on the platform for tri-party activity to further grow. According to the latest ICMA EU repo survey, around 30 % of all repo trades in Europe are using non-T2S securities such as Japanese government bonds or US treasuries. With a narrow scope of T2S securities involved in tri-party, some banks may not see the use of using the platform. For example, only 8 % of tri-party is conducted within T2S. However, many are hoping the inclusion of new entrants to the tri-party market could further open up tri-party in T2S. Last year, BNP Paribas Securities Services announced the launch of a new tri-party collateral platform, becoming the first institution to enter the market in over 15 years.“ We launched our tri-party service last October and have focused on our main clients,” says Emmanuel Denis, head of tri-party collateral management, BNP Paribas Securities Services.“ For our sell-side
28 Global Custodian Summer 2018