DTCC and Euroclear target collateral shortfall
US post-trade services company the DTCC and Belgian settlement specialist Euroclear are planning to create a joint service that aims to provide better, safer collateral management for market participants.
The question of how best to manage collateral has been a recurring fixture of financial services debate in recent months. It has been estimated that as much as $6.7 trillion may be needed to cover the cost of new rules such as Basel III, Dodd-Frank in the US and EMIR in Europe. That figure rises to $11.2 trillion in stressed market conditions, according to separate estimates provided by financial consultancy Finadium and the US Treasury Borrowing Advisory Committee respectively.
The joint service from the DTCC and Euroclear is intended to be an industry cooperative, open to all other collateral processing providers such as custodians and central securities depositories that wish to join. The idea is to create a single pool of collateral for clients, so that they can manage their collateral as efficiently as possible wherever it is held.
“The industry is focused on collateral management as a result of concerns over how to address operational and counterparty credit risk while navigating the changing regulatory landscape,” said Michael Bodson, president and chief executive at the DTCC.
“DTCC’s Margin Transit Utility, currently under development, will help mitigate risks, lower costs and create greater efficiencies, by providing straight-through-processing to help satisfy obligations of clients. We look forward to leveraging the strengths of both institutions to meet the collateral needs of industry participants.”
According to research published earlier this month by Celent, the cost to fully upgrade the financial industry’s infrastructure to make efficient use of collateral will reach $53 billion. Such figures have led to widespread talk of a collateral shortfall – and to various industry initiatives designed to plug the gap.
In April, Standard Chartered enlisted Clearstream and Euroclear to a new scheme designed to help investors margin their exposures from a single, larger collateral pool. Meanwhile, Citi has recently introduced segregated collateral custody accounts to help improve the efficiency of collateral and formed its own deals with Clearstream and Euroclear. In addition, in January the central securities depositories of Germany, Spain, Brazil, South Africa and Australia formed a Liquidity Alliance that aims to tackle the global collateral shortfall.