[ M A R K E T R E V I E W | T 2 S ]
market , providing a single access point for all T2S markets in central bank money and its ICSD in Luxembourg . The aim for the new model is to remove the barriers to the movement of securities and collateral across Europe . According to Phil Brown , co-CEO of Clearstream Banking , the model will operationally blend both central bank and commercial money , and therefore combine domestic and international liquidity into a single access point . “ The new T2S Investor CSD model allows our clients to take automatic mobilisation of collateral to the next level ,” says Brown . “ Clients are now able to manage their entire collateral pool across Clearstream ’ s CSD and ICSD . This results in an optimised use of collateral across locations as well as enhanced liquidity management .” “ This step brings the first real cross-border volume onto the T2S platform – finally making the ECB ’ s vision of a harmonised pan-European settlement landscape a reality .” The new model is already live for the Belgian , Dutch , French , Italian and Luxembourgish markets , with others follow on a country-by-country basis . Unsurprisingly , Euroclear is also developing a similar structure to enable banks
to use assets held within T2S to finance their positions outside of the Eurozone . Olivier Grimonpont , global head of collateral management and securities financing for Euroclear , believes banks and collateral managers should not be held back in settling their collateral in only one operating environment . “ Your custody location determines your settlement location ,” he explains . “ With dealers willing to benefit from T2S , we will see more and more demand to settle collateral management operations in central bank money in T2S . “ However , your choice should not limit your ability to finance your assets with a counterparty that has made the same custody decision . “ It is important that the collateral manager offers the possibility to cross-settle between the T2S world , settling in central
bank money , and the ICSD world settling in commercial bank money . “ Several clients will most likely opt for a mixed model , keeping different custody locations for different asset classes , and it is therefore paramount that the tri-party agent offers pooling solution to those clients , enabling them to mobilise assets from different locations into one transaction and to allocate them to the counterparty ’ s preferred custody location .”
Tri-party ’ s growing importance T2S has also spurred the use of tri-party agents , largely influenced by tri-party securities lending where there has been an increase in demand for non-cash collateral and collateral transformation .
“ It is important that the collateral manager offers the possibility to cross-settle between the T2S world , settling in central bank money , and the ICSD world settling in commercial bank money .”
“ Over the past couple of years HQLA have been more in demand , but circulation of those assets as collateral has not been as fluid as it could be .”
OLIVIER GRIMONPONT , GLOBAL HEAD OF COLLATERAL MANAGEMENT AND SECURITIES FINANCING , EUROCLEAR
MICHAEL ALBANESE , GLOBAL HEAD OF COLLATERAL MANAGEMENT , JP MORGAN
The quantitative easing ( QE ) programme of the ECB and other central banks has further increased demand for tri-party collateral management services . Banks and dealers are viewing the tri-party market as a way to manage their collateral inventories however , certain difficulties remain to achieve efficiencies within T2S . HSBC ’ s Moran believes encouraging tri-party interoperability will significantly enhance these processes . “ To fully support these goals , tri-party agent standardisation , including messaging , valuations , product classifications and multi-product functionality is necessary ,” adds Moran . But to achieve this is no easy task for a tri-party agent . Euroclear ’ s Grimonpont argues that while clients want the ability to optimise collateral allocations , tri-party agents are less inclined given the complexity involved . “ Clients want the ability to optimise the allocation of collateral , and the complexity of optimising across counterparties , asset classes , collateral service providers and to link it to regulatory requirements of each individual bank , makes it increasingly meaningless for a tri-party agent to try to optimise collateral ,” explains Grimonpont . “ Rather , dealers want the tri-party agent to use their own optimisation as a guide for the tri-party agent to allocate the optimal assets in each individual transaction . Dealers increasingly need a system that provides more tailor-made services allowing them to have better control of their collateral processes and real-time reporting to enable optimal use of their inventory .’’ T2S will also have to allow a greater range of asset classes and securities to be transacted on the platform for tri-party activity to further grow . According to the latest ICMA EU repo survey , around 30 % of all repo trades in Europe are using non-T2S securities such as Japanese government bonds or US treasuries . With a narrow scope of T2S securities involved in tri-party , some banks may not see the use of using the platform . For example , only 8 % of tri-party is conducted within T2S . However , many are hoping the inclusion of new entrants to the tri-party market could further open up tri-party in T2S . Last year , BNP Paribas Securities Services announced the launch of a new tri-party collateral platform , becoming the first institution to enter the market in over 15 years . “ We launched our tri-party service last October and have focused on our main clients ,” says Emmanuel Denis , head of tri-party collateral management , BNP Paribas Securities Services . “ For our sell-side
28 Global Custodian Summer 2018