Global Custodian Clearing and Settlement Issue 2018 | Page 9

segregated accounts at Euroclear, enabling
collateral to be ported directly to the CCP.
This set-up reduces the transit risk which
arises when initial margin is posted to the
CCP via a clearing member. The service
subsequently won the Best Innovation in
Market Infrastructure honour at Global
Custodian’s annual London awards in
March 2018.
“Clients are certainly supporting the
custodial account structure BNP Paribas
has at LCH. Post-crisis, many clients placed
a growing emphasis on asset segregation
and security of collateral, which i s why
this segregated account structure appeals
to them. Equally, many customers want to
move their collateral for initial margin as
efficiently as possible to the CCP, and they
do not want to incur the transit risk of shift-
ing collateral through a clearing member,”
said Kieron Smith, deputy head of prime
services and financing at BNP Paribas.
BNP Paribas is one of several early stage
adopters of this account structure along
with HSBC, JP Morgan and Aviva Inves-
tors. “The segregated custodial account
structure makes operational sense for
clients from a collateral optimisation point
of view. A number of people have made
comparisons between the segregated cus-
todial account structure and the individual
segregated account structure (ISA), but
the key difference is the latter still requires
collateral to go to the CCP via a clearing
member. I anticipate client take-up of
these new custodial segregated account
structures will increase as people famil-
iarise themselves more with the concept,”
added Smith.
Looking ahead, some believe that effective
collateral management will be critical if
euro-denominated swaps clearing moves
into the EU as a consequence of Brexit. The
European Central Bank (ECB) has been
vocal in its demand that euro denominated
clearing be repatriated inside the EU from
the UK, particularly if such transactions are
seen as being systemically important.
This presents a massive problem for
financial institutions as it could seriously
fragment the OTC market, resulting in re-
duced liquidity and increasing the amount
of margin OTC users have to post across
multiple venues. In this sense, it will force
firms to ensure their collateral manage-
ment processes are optimised in order to
weather any Brexit side-effects.
“Many clients placed a
growing emphasis on asset
segregation and security of
collateral, which is why this
segregated account structure
appeals to them.”
KIERON SMITH, DEPUTY HEAD OF PRIME
SERVICES AND FINANCING, BNP PARIBAS
Summer 2018
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