Clearstream allies with Belgium’s Belfius
Central securities depository Clearstream has partnered with Belgian bank and insurance firm Belfius to develop a new collateral service for bilateral trades, focusing on OTC derivatives and aimed at corporates and medium-sized banks.
Due to be launched before the end of this year, the deal should allow Clearstream customers to use their collateral more effectively for cleared and uncleared OTC derivatives trades by reducing fragmentation. Clearstream will offer margin calls, dispute management, portfolio reconciliation, legal contract review and administration, payments and settlements reporting, a cash reinvestment mechanism and collateral transformation.
“With this service, we are able to address the growing pressure triggered by regulatory changes in the OTC derivatives world on a short time-to-market basis by combining the expertise of Belfius with the collateral management product range of Clearstream,” said Stefan Lepp, head of global securities financing at Clearstream. “Forging strategic partnerships with key industry players is an important part of Clearstream’s business model and we are sure our relationship with Belfius will be very beneficial for our customers.”
Clearstream is a part of the ‘Liquidity Alliance’ between the central securities depositories in Germany, Spain, Brazil, South Africa and Australia that was announced earlier this month. The five companies of that alliance will meet each quarter to work out the most efficient way of dealing with collateral and to discuss partnerships, commercial opportunities and key issues.
Both moves by Clearstream are a response to the rising collateral requirements imposed by new international trading and banking rules. Under Basel III, banks will be subject to higher collateral requirements. At the same time, new trading rules contained in Dodd-Frank in the US and EMIR in the European Union will require banks to post margin at central counterparties for the majority of OTC derivatives, or pay huge fees to use more customised bilaterally traded contracts.
According to research published by BNY Mellon and Rule Financial in December, the amount of initial margin that will have to be sourced can be substantial – around 1-3% of the notional value of the contract for a typical 5-year vanilla interest rate swap. For long-dated or complex contracts, the amount of collateral required increases substantially because of the greater potential future exposure, to around 10% of notional for a 30-year and 15% of notional for 50-year tenors. In addition, the Investment Management Association has identified as “not unusual” the requirement for CCP-eligible collateral equivalent to 20% of the investment value of test portfolios to be able to meet initial and variation margin obligations on typical OTC derivatives strategies under mandatory clearing.
Meanwhile, earlier in January Citi established a set of alliances with Clearstream and Euroclear Bank that it claims will transform the way broker-dealers manage their collateral. Previously, broker-dealers would work out which assets to collateralise and then move them from their own trading accounts to the tripartite agent who would manage the collateralisation. Under the deal with Citi, the agent will now instruct the collateral moves on behalf of the broker-dealer, potentially making the whole process easier.