In a recent DerivSource webinar, panellists from Murex, Commerzbank, InteDelta and State Street discussed the imminent arrival of TARGET2-Securites (T2S), and the impact it will have on collateral optimisation.
The panellists expect big and positive change to come from T2S in the longer term—including increased collateral velocity, cheaper and faster collateral optimisation techniques and the effective use of equities as collateral. However, in the near term, especially for firms that are active globally, utilities services and tri-party solutions may have a greater impact on collateral optimisation strategies.
Etienne Ravex, product manager, Murex
“In addition to managing their own strategies, firms have to keep an eye on the services being offered by utilities, as these will become external drivers for optimisation.”
Not only do firms have to define their own optimisation plans, but the market itself is also getting very organised. It will be fundamental to be able to increase the access to collateral assets, and to be able to widen and broaden the base of any optimisation algorithm at the end of the day—so firms will look closely at what infrastructures are providing.
We have T2S in Europe, and there are custody hubs being set up in the US and in the Asia Pacific region. If they manage to deliver the expected value of their services, which is basically making assets available in the unified settlement framework, it’s going to be a huge driver for firms to get into more systematic substitutions and rebalancing of collateral inventory.
In addition to managing their own strategies, firms have to keep an eye on the services being offered by utilities, as these will become external drivers for optimisation.
Eric Bystrom, head of TradeCycle solutions, director market services FIC, Commerzbank
“In the longer term, what will be interesting is how do you monetise strategies identified in the front office. That’s going to be largely driven by initiatives such as T2S, but also other interesting concepts such as industry utilities, and the concept of outsourcing and partnership.”
In the short term and from a sell-side perspective, the regulations are driving the agenda. If you look at the immediate aftermath of the financial crisis, the sell side was quick to adopt some simple algorithms to optimise collateral more effectively. But that was based on the eligibility of collateral being negotiated between the sell side and the buy side. The eligibility criteria were very broad, and it was fairly simple to adopt some short-term strategies and achieve some quick wins. However, now the regulators are imposing on the market what constitutes good quality collateral.
We are adapting our thinking and our algorithms to think about what is now the optimal state. That is going to continue to drive our agenda in the next six to 18 months.
In the longer term, what will be interesting is how do you monetise strategies identified in front office. That’s going to be largely driven by initiatives such as T2S, but also other interesting concepts such as industry utilities, and the concept of outsourcing and partnership.
A knock on effect in the longer term will be how Banks mobilise service models towards their clients, helping clients achieve greater understanding of how, being effective in the overall management of the collateral process can bring commercial benefits to them. Also in offering clients creative solutions in the global valuation, optimisation and subsequent mobilisation of client collateral.
Nick Newport, managing director, InteDelta
“The ECB guarantee on the T2S settlement process may allow for people to use European equities more readily as collateral.”
T2S will be interesting, but there is clearly a long way to go. There has been a ramping up process over a number of years. It mostly affects large banks and broker dealers at the moment. There is currently limited buy-side access to T2S, which needs to be resolved.
But there are clearly big benefits coming out of T2S—not least of which, it may make the use of European equities as collateral become more common. One of the problems with using equities as collateral at the moment is the high rate of failures and the lack of guaranteed settlement. The European Central Bank (ECB) guarantee on the T2S settlement process may allow for people to use European equities more readily as collateral.
I think over the long term T2S is going to have significant benefits. But in the near term, for firms that work globally, triparty solutions are going to be where the big bang for the buck is in terms of faster mobilisation of assets.
The triparty structures offered by Clearstream and Euroclear will be fundamental to the long-term strategies of most firms in this space. The mobilisation, the real-time books and records movements that get provided through those mechanisms are the best foundations of an optimisation process. There are silo issues, but they do allow a lot more effective mobilisation of collateral than traditional methods.
Joern Tobias, managing director, product management EMEA, asset management, global product management collateral services, State Street Bank
“It will be cheaper and much faster to move collateral around for optimisation purposes.”
I believe T2S will have a twofold impact. One is increasing collateral velocity, which will really help to reduce the impact on the collateral inventory. The other is that it will also help collateral optimisation techniques, because it will be cheaper and much faster to move collateral around for optimisation purposes.
* To hear more insight shared from these industry experts, please visit the On Demand version of the webinar “Collateral Optimization: Techniques for both Pre-Trade & Post-Trade.”
