acsda 2011 general assembly - bermuda the increasing role of the csd in collateral management and...
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ACSDA 2011 General Assembly - Bermuda
The increasing role of the CSD in collateral management and OTC trade registration
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Secular trends impacting our business - Mitigation of “too big to fail” – prevention of “too big to save”.- Regulation and transparency:
- EMIR
- Creation of new pan-European regulator - Basel III.
- Risk management focus across the financial industry.- Larger clients now seek services across asset classes.- Competition and consolidation above us in the securities
lifecycle.- In Europe, public sector intervention directly into the CSD
space: - Target 2 Securities
- Code of Conduct on Clearing and Settlement - Consultation process on CSD regulation.
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In Europe, an enormous amount of external influences are already in train…
MIFID
Price transparency
CSD competition
Customer protection
Code of Conduct
Interoperability
CSD competition
Price transparency
Service comparability
Market access
Service unbundling
Removal of Giovannini Barriers
Particularly:Legal and tax
IT interfaces
Market access
Market harmonisation
T2S &CCBM2
EUR settlement
Common CSD market access
Via a common collateral platform (CCBM2)
Integration of European market infrastructures
Efficient interoperability
Virtual asset poolaccess for CSD customers
Low investment costs – quick to market
Facilitator for T2S
Level playing field
Interoperability and competition
No barriers Reduced costsCross-border
efficiency
EU financial service action plan / Lisbon agenda Private sector
Common goal: a single harmonised financial market with standardised processes
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…and further regulation is in the course of implementation… - EMIR – European Market Infrastructure
Regulation - follows a similar approach to Dodd-Frank in the
USA. - seeks to regulate the OTC derivatives market
through: - greater volume of CCP clearing in OTC derivatives - greater transparency in OTC derivatives exposure - registration of OTC derivatives trades - collateralisation of counterparty exposure - inclusion of non-financial corporates in the regulation.
- implementation – December 2012.
- Basel III – a game changer for the utilisation of bank balance sheets.
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What does this mean for the infrastructure providers in Europe?
Successful providers will need to offer the market…
- Excellence in custody services
- Collateral management services
- Critical breadth
of asset classes coverage: fixed income, equities, investment funds, derivatives
- Maximum liquidity re-use (central bank money settlement combined with commercial bank money settlement)
- Single access point connectivity
- Broad market coverage
- Reliable and STP process
- Choice of settlement locations (eg CSD / ICSD)
- Cross-border transaction fees lower than today’s domestic fees
- Low fixed fees
- Capacity to finance continuing investment
Value-added services
Multi-value support
Pan-European settlement
Price / cost leadership
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The evidence of change so far… - Dramatic increase in demand for:
- combined CSD / ICSD and collateral management services- anonymous access to the money markets.
- Confusion / Consternation amongst the ill-prepared corporate sector.
- Widespread projects to seek maximum collateral / capital optimisation within banks.
- Pressure from national central banks to remove structural barriers to more efficient liquidity access.
- CSDs working together, more than ever before, to seek opportunities in the new environment:- Link Up Markets- REGIS-TR- Clearstream and CETIP – collateral management.
CSDs find themselves at the epicentre of the changes impacting global capital markets
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REGIS-TRa case study in CSD
collaboration in OTC derivatives
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REGIS-TR – The trade repository for OTC derivatives
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9
REGIS-TR
Feb 2011European Market Infrastructure Regulation – Draft Proposal
Proposed European Regulation
Key components in respect to trade repositories are: The risk mitigation goals impact financial and non-financial (i.e. corporate)
market participants
Clearing to be mandatory also for non-financial market participants beyond a certain activity threshold; non-standardised, non-clearable contracts should be electronically confirmed with an auditable monitoring process
A reporting obligation for OTC derivatives positions no later than trade date plus 1 to record and report contracts with ESMA-registered trade repositories
Competition promoted among trade repositories in general and by derivatives class, providing a transparent service on a cost-related basis
ESMA will define the technical standards for reporting by June 2012
The new regulations apply from end-2012
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10
REGIS-TR
Feb 2011
50% 50%
Shareholders: Two well known European Market Infrastructures Providing exchange trading, clearing, settlement and custody services
European based (Luxembourg) entity with global reach Open governance structure To be ESMA regulated and looking for compliance with non-European regulators across the
globe Service covering all OTC derivative products (one-stop-shop) before regulation materialises Servicing all types of market participants and respective activity profiles in the OTC
derivative space
REGIS-TR Shareholders and governance structure
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11
REGIS-TR
Feb 2011
Future developmentsParallel development of optional value-added services for the industry
Value-added Services
Transaction reporting:
Application as ARM under MiFiD
Offering of transaction reporting for OTC derivatives in accordance with MiFiD II
Exposure valuation:
Inclusion of pricing and valuation data: Directly by the participant – bilateral exposure agreements
Independent third-party exposure valuation
Collateral Management:
Existing international or domestic collateral pools for collateralisation of exposures in OTC derivatives
White-labelled Trade Repository services:
Provision of REGIS-TR expertise to domestic repository solutions – discussions ongoing in Americas, Africa and Asia/Pacific
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Clearstream & CETIPa case study in CSD
collaboration in collateral management
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CETIP wishes to develop…
…a comprehensive collateral management offering to help Brazilian banks reduce their capital requirement and improve
process efficiency
Service currently offered by
Service supported by Algorithmics system
Service supported by collaboration CETIP & Clearstream
1. Establishment
2. Servicing (payment and exposure mgt)
OTC contract Services OTC contract Services“life stage” “life cycle”
3. Servicing(tri-party collateral mgt and reporting
4. Repo services
5. Termination
Collateral level calculation
Collateral haircut Calculation
Collateral identify / optimisation
Collateral calls and movement
Collateral mark-to-market
Asset servicing / corporate actions
Basic client reporting
Basic regulatory reporting
Advanced client reporting
Advanced regulatory reporting
Tri-party repo
Settlement payment calculation
Settlement payment
Registration
Initial collateral
Payment calculation
Payment netting
Payment
Exposure calculation
Exposure capture
Exposure matching
Exposure netting
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Scope of the agreement (1/2) - CETIP and Clearstream will cooperate in the area
of collateral management for the benefit of the Brazilian market and its participants.
- Cooperation will be guided by feedback received from market participants, CVM and the Central Bank.
- Step-by-step phased roll-out of service – CETIP and Clearstream agreed on scope of first project phase:
- collateralisation of OTC derivative exposures registered at CETIP- exposure calculation as optional feature- CETIP and SELIC assets eligible as collateral- collateral management functions powered by Clearstream
- collateral movements will only occur domestically, ie Brazilian jurisdiction
- reporting will re-use most of Clearstream’s existing reporting facilities (translated into Portuguese).- implementation of phase 1 is scheduled to the beginning of 3Q11
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Scope of the agreement (2/2)
- Second project phase will be subsequently agreed following requirements and feedback from the market place.
- Current ideas include: - inclusion of international assets held at Clearstream
- triparty repo service.
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Collateral management structure
Mobilisation of domestic assets using triparty collateral management
CETIP
Giver Receiver
Triparty collateral management functions
CETIP & SELIC assets
OTC derivatives trades
Exposure
notification Exposure
notification
Exposure
notificationCollateral
transfer instruction
Eligibility checkSecurities valuationAutomatic allocation
Automatic margin callsUnlimited substitution processReporting
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In summary…
- The external environment has become very volatile.
- Consequently we are all faced with new situations – both opportunities and threats.
- The CSD role must change dramatically to react to this new environment…
…and the key decision is how best to navigate to your target business and operating model
- Very few CSDs have the financial and management means to cope alone with all the changes……even those that do are well advised to collaborate – leveraging “economies of network” is faster, cheaper and more efficient than buying “economies of scale”
- CSDs that do not learn to collaborate risk being marginalised
Hence why we believe firmly in partnership and interoperability
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Thank you