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Foreign Exchange

Agency Cash Management (ACM) tri-party platform roundtable

Participants at Global Investor/isf’s tri-party roundtable debate the effects of the ECB’s long term refinancing operations, the impact of Basel III and the regulatory drive for transparency


Tri-party roundtable participants

• Chair: Simon Murray
• Alan Hutchins, vice president, BNY Mellon, global collateral management, broker dealer services
• Ulf Bacher, co-head of the agency cash management business, Newedge
• Oliver Clark, money market product manager, MTS
• Richard Glen, head of global securities financing sales, UK, Ireland and Americas, Clearstream Banking
• Olivier de Schaetzen, director, product solutions, global markets, Euroclear
• Grant Davies, head collateral management sales EMEA, J.P. Morgan
• Mark Barnard, managing director and global head of ESR liquidity management, RBS Global Banking & Markets
• Sam Edwards, European head of collateral trading, Credit Suisse Securities Europe

Chair: What innovations are your firms introducing into the market right now? Alan Hutchins: One of BNY Mellon’s major initiatives is IT infrastructure, making it more client-friendly and customisable, providing dashboards, different options for sharing information, and providing information more on a real-time basis. Building the enhancements our clients are asking us for, such as alternative ways to optimise baskets of collateral. We’re also working with the exchanges and the CCPs. Making a product where collateral becomes absolutely agnostic in terms of where it comes from, so if you need to take collateral from a pooled account and put it in a segregation account, that’s what we do.

Ulf Bacher: Newedge and MTS’s plan for the Agency Cash Management (ACM) tri-party platform is to capture the plain vanilla collateral liquidity financing activity. We believe that as well that the cash providers, the collateral providers, the tri-party agents, CCPs, and the rest of the market, plain vanilla needs to be a ‘machine-like activity’. The machine will be a main cash versus collateral exchanger. It allows the banks and the other service providers to focus on their value-add.

Oliver Clark: We launched version one of our ACM tri-party auction platform in January of this year and right now we are working on the technical develop- ments for phase two that will go live in the summer. This release includes multiple technical enhancements including the addition of floating rate and open repo trades, sub accounts for cash providers in addition to fully automating the transmission of settlement messages to Clearstream and Euroclear. In the longer term the focus is receiving the requisite regulatory approvals to roll out the platform in the US and beyond.

Richard Glen: Our group strategy revolves around collateral management, not just at Clearstream, but across Eurex and the Deutsche Börse Group. It’s important that we help our clients pre-empt the future and help them to find a safer place for their collateral and their businesses. Our big initiatives this year are all about time to market delivery. We feel we’re at a stage in the industry where there are a number of projects that will change the way that infrastructure will work in the future if we use the momentum to realise these quickly. At the current time, we’re focusing primarily on what we call Liquidity Hub GO, an outsourcing arrangement we’re offering to domestic infrastructure providers, and Liquidity Hub Connect, where we’re looking to do the same thing with agent banks or sub-custodians. This is encouraging the use of a much wider collateral pool across the globe and giving counterparties a better, more effective access to that collateral pool.

Olivier de Schaetzen: Collateral optimisation is definitely top of the agenda for most of our clients. We are trying to make life easier for our clients in meeting the challenges of collateral management. We continue to on-board new cash providers into tri-party as quickly and easily as possible, as people move away from the unsecured deposit market to the secured market. Euroclear is almost at the end of a tremendous investment cycle to upgrade our tri-party collateral management service portfolio. In addition to many new features, we are expanding our tri-party services beyond the scope of Euroclear Bank. For example, Euroclear France clients have been using our tri-party services for open market operations conducted by the Banque de France since the end of 2011. A significant part of the central bank’s open market operations is now conducted with the French CSD’s tri-party mechanism in Paris. The second piece of infrastructure that we’ll be delivering in June this year will provide clients with a very efficient way of sourcing domestic collateral to cover their financing needs in tri-party. This development will increase the mobility of collateral across different settlement locations, as there are sizeable pools of collateral in domestic markets that are as yet untapped as collateral for financing with international counterparties.

Grant Davies: J.P. Morgan has also made a lot of investment in the European triparty space over the past four years. Tri-party platforms need to evolve with the market, and evolve with the regulatory environment, irrespective of the demand. We already operate on a 23-hour basis across the globe. Our clients expect to be able to use assets globally, whether it be derivatives collateral management, tri-party repo or securities lending. We are developing new functionality, such as Global Longbox, to make it easier for our clients to do business and gain greater market access. Our recently announced partnership with the Hong Kong Monetary Authority (HKMA) on collateral management is another example of the foundations we are laying.

Sam Edwards: Key to Credit Suisse’s Prime Services business is the financing of hedge fund assets and for us right now the focus is non-cash - term financing on a non-cash basis. Globalisation is important with respect to the securities we can use within the tri-party system, as is the availability of cross-regional and cross-product data within the system. Regulatory reporting is increasingly demanding of our time and there’s a role that can be played here by all of us in creating uniform reporting. That is where tri-party providers may be able to help provide transparent and consistent regulatory reporting. At the moment we all do it slightly differently.

Mark Barnard: We’re looking at the impact of Basel III on tri-party, but tri-party isn’t the be all and end all for funding. Tri-party asset mobilisation only goes so far. Like many funding desks, one of RBS’s key drivers is to reduce its amount of unsecured borrowing. We want to take our unencumbered pools down as low as we can. It’s key we can gain access to all our inventory and look at structures that allow us to fund assets that can’t be readily deployed today. One of my biggest focuses for this year is to try to create a market sector – probably in a custody style platform rather than tri-party - where we can monetise unencumbered assets. Therefore the inventory funded by our treasury department sitting long in our box is truly minimised.

Chair: What impact has the ECB’s €1trn injection into the Eurozone financial system had on collateral, balances and funding?

Glen: On the fixed income side, clients are looking for a much safer place to put their money and the credit rating agencies have narrowed the available market in terms of assets. Institutions still fear what’s going to happen next and a lot of collateral is being parked with the central banks. As such, we’ve seen no dramatic growth in traditional tri-party repo business.

De Schaetzen: We haven’t seen a lot of changes in tri-party balances following the two LTROs conducted by the Eurosystem. This is probably linked to the fact that the collateral mobilised by the LTROs had already moved away from the tri-party repo market. This pool of collateral is now isolated with the European Central Bank, and will neither be traded nor priced for a long time. The challenge we need to be prepared for is when the ECB offers the banks the opportunity to redeem their positions, starting at the end of this year. The question is, how will this collateral gradually find its way back to the commercial circuit?

Barnard: If you look at balance sheets generally they’re getting smaller, and people are deleveraging. Hedge funds aren’t finding opportunities to invest their money in the market. They’re going longer in cash like everybody else. My biggest challenge today is finding inventory. Non-cash collateral trades are at a premium as a consequence, and I don’t really see that changing in the foreseeable future. Our ability to put more balance into tri-party providers is going to be hindered. Right now we’re trying to juggle many demands with not enough collateral, and that’s only going to get tighter.

Edwards: You mentioned hedge funds. We see them being more defensive this year than last year. They’re less willing to be out front leading the market despite many having had a good first quarter. They got burnt last year and don’t want it to happen again this year. This impacts the assets that we have to finance. What’s interesting, from the equity financing side, is what would have happened if we hadn’t had the LTRO? We’ve still been able to trade with a good variety of counterparties, still looking at a fairly wide range of collateral and durations. The question is whether it’s a can-kicking exercise or has it fundamentally changed the environment?

Bacher: When we talked to people about launching our ACM platform they said, ‘if you bring cash you will have real business.’ Now, six months later the LTRO is in the market and all of a sudden there is no collateral available anymore. This presents a real problem for the financing market. If new cash is coming from new tri-party repo users you need collateral against that. On the other hand, countries are on life support from the ECB and that will probably continue for the time being, which means new cash providers only trade with traditional good names and completely exclude the weak names. That’s a real issue because you need to bring new financing resources not only to the top names but to the whole market.

Davies: The ECB providing so much cash can be limiting from a tri-party perspective. We are currently in the dividend season and we are seeing massive demand for quality collateral. But the collateral is not always available. Market participants are looking to substituting collateral with Euros because Euros are excessively long. This all comes back to Olivier’s earlier point, what happens when the ECB starts to unwind their positions?

Glen: There are a lot of counterparties who have previously focused on the Eurozone as being the main source of their collateral pool but the overall pool of good quality collateral is starting to narrow driven by changes in ratings. AAA is now becoming much more of an elite club than it used to be and people are being forced to look elsewhere to cover their higher grade financing needs, in particular to the likes of Asia and South America. We’re heavily involved in franchising collateral management arrangements in Australia, Canada, South Africa, Brazil and Spain and the demand is starting to grow as institutions realise that collateral management is a global reality.

Davies: Yes, we are seeing a big push in the Asian markets. Korea and Taiwan have been active on a bilateral basis, but those clients are starting to move to a tri-party agent. This takes time. It is not a straightforward process. Similar to our work with the Hong Kong Monetary Authority, we are working on more partnerships that hopefully will make cross-border activity between regions even more liquid, with more worldwide interaction on the financing side. This is a significant step in improving liquidity across the regions.

Hutchins: The overall the impact of the LTRO from BNY Mellon’s perspective as tri-party agents has been surprisingly little. We didn’t see an outflow of collateral to go into the LTRO, the assumption is that we wouldn’t be pricing these securities anyway, and we haven’t really seen any impact of the cash back out in the market.

Chair: How is the market assisting the regulatory drive for transparency, pre and post trade? Is there enough market information on different aspects of repo?

Clark: Regulations are having a massive impact on all markets at the moment. Everything we do today is related to the regulations in place or the regulations that will be in place over the next couple of years. We’ve created the ACM as an MTF platform regulated by the FSA. That was imperative - it wouldn’t have worked if it was just an electronic platform without regulatory approval. We are obliged to report effectively on a daily basis and publish a certain amount of data pre- and post-trade. That’s a primary appeal to counterparties we’re talking to, who are not so familiar with the structure of the repo markets, and perhaps are slightly wary of going into the market. We’re seeing more transparency in swaps, we’ve already seen it in the inter-dealer cash and repo markets and that’s what we’re trying to bring to tri-party as well.

Davies: In the equity repo market, pricing is not published, whereas fixed income repo is screen-based and levels are readily available. Firms like ACM provide good market colour and plans to include equity repo. On the securities lending side, Data Explorers publishes a lot of information around what’s lent, rates, haircuts applied etc. I am curious, how do the people in the room feel about publication of repo haircuts and repo levels? In the equity space, this has been less public. Transparency is important, however, in encouraging new participants into the equity financing market.

Edwards: The key point is credit risk. It’s very difficult to have a uniform price these days. We work closely with our credit department to assess the risk in terms of the firms we’re trading with and this impacts how we price trades as much as the assets underlying the trade.

Bacher: ‘Data’ is the name of the game. We have been hearing from central banks and other participants who have an interest in the repo market that transparency is missing, for example the size or comparative figures like gross versus net numbers. The flipside, of course, is you can only have data if you can compare apples with apples. One key requirement for data to be useful is the standardisation of baskets which is not yet achieved. ACM aims at doing that. Repo data also depends on credit, on the counterparty, on the collateral, so it’s a real issue. I do think the market needs to provide transparency in order to attract new participants. Data is available and the more participants demand data the higher the chance is that tri-party repo get standardised.

De Schaetzen: A common question we receive from new prospects coming into the secured world is, ‘where are repos traded? How can I benchmark my investment?’ And we say, ‘apart from requesting quotes on a specific basket, you are not going to get standardised benchmarks for different terms or currencies.’ That’s an impediment for new cash to come swiftly into the market. Greater transparency would help the flow of new participants to the repo markets.

Glen: This is where Basel III becomes more interesting because a lot of the talk is about how Basel III is relatively negative for the banking community. But in a positive sense, it’s actually placing a regulatory definition around the use of the standardised basket. It’s saying that ultimately if you have collateral which is LCR eligible and you can trade that, it becomes more attractive than something that’s not. This is placing more of a regulatory seal of approval on some of the standardised baskets already offered by the likes of Eurex’s GC pooling baskets as well as Newedge’s ACM product offering.

Hutchins: The challenge is that we have thousands of baskets. When a new client prospect asks ‘what’s the average equity haircut you see here?’ you can tell them the average, but that’s misleading, because there are so many different factors. Some people who will take 5% equities in an overall basket and some will take 100%. The one thing I would say is that all triparty agents provide vast amounts of data to central regulators based on all the information in our tri-party client programmes. So in terms of transparency to regulators, that’s certainly increased exponentially.

Bacher: As repo is so much in the spotlight of being negative or used to leverage and destroy the financial system, I think as a user group we have to make the effort to step forward to increase transparency, rather than talking about the hurdles. Not everybody likes transparency though. We need to stress the fact that tri-party repo is a wonderful tool to use, it adds a lot of value. We have to enhance transparency, and everybody has to understand that transparency is beneficial for the market.

Davies: This happens in every market. The UK market makers back in the 1990s did not want transparency around debt pricing, but when transparency occurred, it quickly became successful.

Edwards: On the external reporting side, restricting transparency isn’t the issue. It’s that there is a huge volume of data that the industry needs to get to grips with, and put into a form that is useful for regulators, investors and banks.

Hutchins: Yes, and we mustn’t lose sight of the fundamentals today, that repo is a great trade, and a very basic trade – you lend someone cash, you get something back. It’s become overlaid with complicated regulation for the collateral giver but is still a very attractive arrangement for the cash lender.

Chair: How will Basel III impact tri-party?

Barnard: In three years’ time, the tri-party market will be very different than it is today. Basel III is going to penalise people for any asset that is funded for less than 30 days. It’s not about equity stock borrow / loan trades or repo business, it’s any equity transaction - be it a derivative and a total return swap, stock lending, an upgrade, a pledge of collateral or certain kinds of UCITS fund which you have to collateralise. Every time an equity goes out the door, pretty much every time, other than a cash equity sale, there’s a potential regulatory requirement that’s attached to that. If I fund my equities for under 30 days, I’m going to take a very penal regulatory charge. If I do a transaction with a counterparty for more than 30 days I may pass that burden back to them. My total returns swap book will be one of my most active books. If you trade under a total return swap rather than a secured financing transaction, you may get preferential regulatory treatment, so firms trading stock lending, repo or hybrids are going to become total return stock kings. Can the tri-party platform handle that? In the future we’ll be sitting round this table talking about tri-party’s newly deployed total return swap system that mirrors exactly what goes on in the stock lending world today.

Bacher: There are major changes coming on all sides. The cash investors need to go secured from unsecured, that’s a massive change. The collateral providers are saying ‘every asset on the balance sheet needs to be financed properly’. Banks have to raise term cash for the regulatory and liquidity buffers, which again changes completely the impact on the repo market. Then there’s the capital charge on repo activity, and I hear the banks are thinking of holding back in financing transactions for customers because it costs the balance sheet and capital. So overall big regulatory changes for the traditional tri-party repo users which could even open doors for non-banks to step in.

Barnard: I agree. The people who fall outside Basel III are non-banks. Groups with massive cash balances – we always recite certain large corporates as examples - can sell away 30, 60, 90 day money without any regulatory impact whatsoever. As such they’ll have a strong advantage over the money banks

Bacher: If you have access to these new players on collateral and cash you are the winner, and if we bring transparency, people will know the value they have in their hands.

Chair: What benefits do you believe collateral outsourcing can bring to your clients in the near future?

Glen: With our Liquidity Hub GO initiative, we have positioned ourselves as a provider of technology and expertise to other infrastructure providers in domestic markets. This all came about following a conversation with Cetip in Brazil where they had originally asked if they could buy our platform. At the time, we responded that the technology was not for sale but we would be prepared to license this to them. This is the reason why Liquidity Hub GO was initiated and is also the reason why the Liquidity Hub Connect service was also created. We’ve spent a lot of time and energy with the likes of Cetip in Brazil, ASX in Australia, Strate in South Africa, CDS in Canada and Iberclear in Spain to make sure that they receive the respective buy-in from their clients, the local regulators and the central banks to move forward with this. It is an approach which is working and is now taking off across the globe as a result.

Edwards: The same goes for improving internal infrastructure in banks, especially with the advent of CCPs and the centralisation of collateral management within banks. We’re coming from a very ‘silo’d’ background of fixed income, equities, derivatives and commodities. The key for all banks going forward is going to be optimisation of collateral across the whole product range. Outsourcing certain areas can help us overcome the internal infrastructure hurdles.

De Schaetzen: We are indeed coming from different asset class silos, but also from different location silos, i.e. where the collateral is held. Increasing collateral mobility is very important - moving assets from where they are held and traded, to where they are needed for financing purposes. If you can centralise knowledge of your collateral holdings with an agent that oversees many of your collateral needs, you can best leverage its collateral optimisation tools. There are innovative infrastructure solutions in tri-party collateral management today that will help facilitate flows of collateral across locations and asset classes.

Davies: In the OTC derivative market alone, $1trn of collateral requirement is expected. All the players, whether existing banks, new counterparties or institutions using their own internal infrastructure will need to evolve and change. We help to educate banks and their internal clients around the benefits of tri-party and the efficiencies they can gain. J.P. Morgan has been very active helping markets such Japan, Australia and Mexico open up tri-party. We are leveraging the existing tri-party toolbox which is flexible and adaptable to accommodate new entrants.

Barnard: One of the main benefits for clients is the upgrade trade, especially for clients who need government bonds on their balance sheet to cover a variety of obligations. Swapping equities for government bonds is a win in so many ways for both the borrower and the lender.

Bacher: The ACM platform presents an ideal opportunity to cut costs via outsourcing. Tri-party agents can come in as providers of efficient collateral management platforms to the financing world.

Hutchins: I do think that the tri-party market is a great value proposition for the new entrants, the corporates and insurance companies we want to attract. We don’t charge collateral takers in our programme, so you get all the advantages of automation, collateral outsourcing, the mark to markets, the intraday, real time reporting, relationship management etc. Tri-party will also have facilities available where clients can post collateral to CCPs and exchanges and this makes the market more efficient due to the book entry nature of collateral movements.

Clark: I’ve been working in repo for 20 years, and I’ve never had such an easy sales pitch as with the ACM platform. The buy side and cash rich corporates have recognised the risk associated with unsecured investments and that the security and flexibility of tri-party repo provide a perfect alternative to deposits and other unsecured money market instruments. We have the expertise to assist them in this change of behaviour and a regulated auction platform on which to execute.

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