The shift from quantitative easing to quantitative tightening has fundamentally changed market dynamics in the financing world. How has this affected your business and your strategy?
We have seen substantial growth in particular in our triparty repo activity. Business volumes are in fact up 17 per cent year-on-year (YoY) and this applies across all main business lines 鈥� triparty repo, securities lending and derivatives. We are very pleased with this.
The market is indeed changing very quickly, driven by increased costs of doing business, for example capital and risk-weighted assets (RWA), regulatory reforms, changing market dynamics, and geopolitical influences. So, we needed to adapt as well. In response we are undergoing a major transformation of our collateral services and client facing teams. And we are investing in every aspect of the collateral business and matching our ambitions with resources.
Our vision is to set the industry benchmark in client experience, service excellence, innovation and resilience for the collateral ecosystem. To achieve this, we have launched a new multi-year investment plan designed to transform the Collateral Highway solution, working closely alongside our clients to ensure the plan continues to address their current and future needs.
One of the most critical needs is time-to-trade. What are you doing on this front?
We are in the process of building a new collaborative digital platform. This will deliver a touchless end-to-end solution for signing collateral agreements and electronic forms, plus drafting, negotiating and implementing collateral schedules.
We have listened to client feedback. What they want are easier, better, faster, more intuitive workflows that are accessible from any part of their organisation. Implementation and amendments of collateral schedules will also be fully straight-through processing (STP) and highly scalable.
This is a three-year project and we realise that will feel like a long timeframe when the market is changing so fast. So, we are rolling out upgrades to our current EasyWay Collateral Contract management module as well.
These latest enhancements, among others, included the ability to implement and amend triparty collateral schedules more quickly thanks to an improved digital signature workflow. Non-EasyWay counterparties can now sign digitally too.
Can you tell us how you are improving your collateral allocation services?
This is a big priority for us and we are continually enhancing our collateral allocation engine, AutoSelect. Dealers can now benefit from reduced cash fails rates as AutoSelect looks at pools of collateral, which have been reused in triparty, for example.
Next, we will be lifting the limitations of what we call 鈥榯hree-way鈥� substitutions. This will enable AutoSelect to identify and execute complex optimisation scenarios. We expect this to eliminate cash fails due to sub-optimal allocation.
鈥淲e also want to give collateral givers increased predictability and flexibility by
allowing them to tailor Autoselect to their needs.鈥�
We also want to give collateral givers increased predictability and flexibility by allowing them to tailor Autoselect to their needs. This personalised approach will enable them to opt-in or out of specific AutoSelect functionalities. For instance, by choosing to engage in allocations in certain processing runs and to add substitutions in others.
The Collateral Highway mobilises a lot of data as well as collateral. How are you maximising this?
That is right, it does work with a lot of data. There is securities reference data, corporate actions data, securities balances data, settlement activity data, collateral profiles data, collateral allocations data, and more.
Increasingly, clients want to have access to this data and use it to run and build internal reports, perform eligibility checks, run simulations, or to feed into an optimiser. So as our third top priority, we are focusing on delivering fit for purpose collateral data in the form that clients need it, and through a variety of different channels such as EasyWay, API, and MFT.
We also intend to use this data to develop value-added services. For example, a new simulation tool replacing Triweb. This will allow dealers to check collateral eligibility for specific trades, taking into account applicable haircuts and concentration limits. Or they can test what-if scenarios by changing eligibility parameters or available positions.
鈥淥ptimal allocation can massively impact financial ratios, and ultimately P&L in a positive way. As a result, we are in the process of delivering a new generation of collateral optimisation services.鈥�
Can you tell us a little about collateral optimisation?
Regulatory reforms have made it vitally important for dealers to achieve an optimal allocation at the end of the business day. Optimal allocation can massively impact financial ratios, and ultimately P&L in a positive way. As a result, we are in the process of delivering a new generation of collateral optimisation services.
First, we are improving our existing Self Select service, which directs the allocation of collateral across a client鈥檚 entire triparty book, with AutoSelect there in the background as a fallback. However, building an optimiser is not easy, and some clients prefer to focus on optimising the few specific trades that will give them the biggest savings rather than their full book. They can do it through our EasyWay portal. And this will be available in any Autoselect run of the day.
We have also made significant improvements to the way we process collateral optimisation swaps, which has substantially reduced credit usage.
This November, we extended the integration of our triparty collateral management platform with Pirum鈥檚 CollateralConnect service. Mutual clients can use their own or third-party optimisation algorithms to determine their optimal collateral allocation.
And of course, the most important project concerns the delivery of a Euroclear fully-fledged collateral optimisation service in association with collateral optimisation service provider, Transcend. This Euroclear service will combine, in real-time, client data with Euroclear data to achieve the best possible collateral allocations for trades in and outside of Euroclear.
Do you believe that financial market infrastructure firms have a leading role to play in building out digital assets infrastructure?
We do, and we are witnessing more and more industry collaboration, which is very positive. One good example is our partnership with Digital Assets, the World Gold Council, and a broad industry group of some 27 market participants to complete a successful trial tokenising gilts, eurobonds and gold for use as collateral across a series of trades. It also helped to show the value that digitalisation can bring to immobile real-world assets.
We are working with Digital Assets on other use cases in the area of collateral exchanges on a digital platform. We are particularly keen to bring additional efficiency to the substantial pool of collateral assets that we have in custody, without requiring our clients to take on an additional custodian.
There is increasing focus on fast-growing markets in the Middle East and Asia. How are you serving them?
Having the broadest possible range of eligible collateral assets is of critical importance to our clients and to us. Take South Korea as one example.
In June, Korean treasury bonds (KTBs) became Euroclearable and eligible for triparty. Since then, we have continued to improve the service. Working with Korean Authorities, regulatory requirements were further relaxed in August to allow simplified account set-up for custodians.
In September, we lifted restrictions on Korean won to allow internal settlement. In November, input deadlines for delivery-versus-payment (DVP) external settlement were further extended, and in December, triparty transactions in Korean won go live.
We are continuously working with issuers and market authorities to help develop local currency markets, make them Euroclearable and expand the range of eligible collateral assets.
One of the biggest highlights of 2024 has been T+1. There were concerns that it might create operational difficulties and there would be timing mismatches for European entities with US dollar assets. Were these concerns valid, or has the market taken everything in its stride?
The US move to T+1 was completed successfully by the market and Euroclear Bank at the end of May.聽We saw the majority of cash market trades in US fixed income move to a T+1 settlement cycle without any drop in settlement efficiency.聽
The T+1 focus now moves to Europe and we have been very engaged with both the UK and the EU. In the UK, we are sponsoring the Andrew Douglas-led independent technical task force, which has done great work defining market recommendations for T+1.聽
T+1 presents different challenges in Europe, especially affecting financing markets and their adaptation to a shorter cycle. We aim to support the market's transition by focusing on infrastructure needs and our clients' requirements.
One of your other major UK-based projects involves the replacement of the Crest settlement and custody platform. Tell us more.
It is a big project and will represent a massive transformation for the gilt market. It also presents us with an opportunity to replace the current DBV service with a fully-fledged triparty service, giving clients more flexibility, for example in defining collateral baskets, use of standard communication channels, etc.
You have also launched a bilateral repo service for the US Treasury market, can you tell us about that?
Yes it is live. We believe it will greatly help the buy side, by providing a low-touch collateral solution for repo that is integrated with their existing trading platforms and custodians. To make it short, it is offering triparty-like functionalities for trades settling over the FedWire system.
鈥淭he Settlement Discipline Regime and the shift to shorter settlement cycles has firmly focussed the industry鈥檚 attention on settlement efficiency and our Autoborrow service is a key contributor as the last resort tool for fail curing.鈥�
We are also piloting a guaranteed repo service with Bloomberg and Sunthay in association with a group of committed market participants and are looking at a third service for the bilateral repo market in Europe.
What developments are you working on in securities lending?
In this sector we recently added term lending options to our GC Access service. We also reviewed the pricing of our Autoborrow service to reinforce the value it brings to borrowers.
The Settlement Discipline Regime and the shift to shorter settlement cycles has firmly focussed the industry鈥檚 attention on settlement efficiency and our Autoborrow service is a key contributor as the last resort tool for fail curing. It is available in our central securities depositories (CSDs) and very much a live service in Euroclear France and EUI.
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Scott Kaffl
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