European post-trade alliance targets repo market
Clearstream, Euroclear and Eurex Clearing have signed an agreement with the ICMA European Repo Council to create a joint project aimed at improving the efficiency of the repo market.
“Today’s MoU is a big step forward towards building a true single European capital market,” said Godfried De Vidts, spokesman for the ICMA European Repo Council. “No longer will the fragmentation of location of collateral in Europe harm the transmission of liquidity between market participants. When completed, this development will contribute to a safer settlement environment allowing banks to allocate cash to the real economy where most needed.”
Repo is a contraction of repurchase agreement, in which the seller agrees to buy back securities at a later date. The ICMA project is based on Eurex Clearing extending the connected settlement locations for its secured funding market GC pooling with Clearstream Banking to include Euroclear Bank. Following feasibility studies and market consultation, the plan is to deliver triparty settlement interoperability by the end of 2015.
A triparty repo transaction is a transaction for which collateral selection and substitution, valuation, settlement and custody during the life of the repo transaction is outsourced by the two trading parties to a third-party agent. Eurex Clearing is a central counterparty, which defines the eligible securities for repo baskets and clears triparty basket trades directed to it by repo trading venues.
Establishing triparty settlement interoperability with both triparty service providers should help to improve the movement of collateral across Europe. It is also intended to reduce collateral pool fragmentation, which can cause technical fails, and help banks to supply liquidity to the ‘real economy’ through the repo markets.
Stefan Lepp, member of the executive board and head of global securities financing at Clearstream added that the aim was to improve settlement ahead of T2S implementation. T2S is the single European settlement platform due to roll out in 2015-16.
“In the challenging environment we face now and in the future, market participants are looking at us – their service providers – to collaborate more and offer innovative solutions to improve operational and settlement efficiencies,” said Yves Poullet, chief executive at Euroclear Bank. “They want us to make the movement of vital collateral assets as fluid and as frictionless as possible across all market infrastructures globally. We fully support such a fundamental requirement and have been implementing this through our open collateral infrastructure called the collateral highway. This project, appropriately entitled Triparty Settlement Interoperability, is timely indeed.”