A SUSTAINABLE SOLUTION TO COMBAT THE GLOBAL COLLATERAL CHALLENGE Luxembourg Madrid Sâo Paulo Johannesburg Sydney TABLE OF CONTENTS THE LIQUIDITY ALLIANCE A global response to the global collateral challenge 4 THE REGULATORY LANDSCAPE Navigating seismic changes to the world’s financial industry 6 LIQUIDITY ALLIANCE PARTNER VIEWS ASX Collateral: building a world-class, globally-connected infrastructure for Australia 8 By Andrew White, General Manager, Settlement Services, ASX, Australia The Liquidity Alliance puts a global spotlight on Brazil’s experience in collateral management 10 By Wagner Anacleto, Chief Operating Officer, Cetip Securities Unit, Brazil Supporting local markets with award-winning collateral management technology 12 By Stefan Lepp, Member of the Executive Board and Head of Global Securities Financing, Clearstream, Luxembourg Collateral management services are now a “must have“ for any service provider wanting to attract assets under custody 14 By Jesús Benito, Chief Executive Officer, Iberclear, Spain Establishing a market standard for collateral management in the South African financial markets 16 By Anthony van Eden, Strategic Projects Director, Strate, South Africa RESEARCH ROUND-UP Recent market studies into the global collateral challenge 19 ABOUT THE LIQUIDITY ALLIANCE PARTNERS 22 THE LIQUIDITY ALLIANCE A global response to the global collateral challenge The global financial industry is in the midst of a period of unprecedented change as it navigates the aftershocks of the 2007-2008 banking crisis. Adapting to these changes is the biggest challenge financial institutions have faced for a long time. The advent of new regulations will have adopted by the members of the Liquidity the effect of opening up the global Alliance, an association launched by five industry to even greater competition at the organisations which share a similar approach same time as institutions face increasing to the global collateral challenge. demands on their investment budgets to ensure compliance with the requirements The Liquidity Alliance was established in of the emerging regulatory landscape. In January 2013 by Australian financial market particular, the new regulatory focus on risk infrastructure group ASX, Brazilian central and liquidity management is key in driving securities depository (CSD) Cetip, the the industry need for greater collateral international central securities depository optimisation. (ICSD) and CSD Clearstream, Spanish CSD Iberclear and South African CSD Strate. While every institution has an individual These five market infrastructures have strategy to adjust to the “new normal”, decided to leverage the same collateral cooperation with other market players technology system and to share their is key to finding sustainable competitive expertise, experience and efforts in creating and efficient solutions. This is the strategy a global response to growing demands for sophisticated collateral management. 4 A SUstaINABLE SOLUTION TO COMbat THE GLOBAL COllateral CHALLENGE CENTRE OF INDUSTRY EXPERTISE JUST THE BEGINNING The Liquidity Alliance members are already The collateral management technology sharing extensive information about trends, behind the Liquidity Alliance delivers a developments and business opportunities white-labelled solution that is unique in in both domestic and international markets. the industry as it enables domestic assets Cooperating in this way is enabling the to remain in custody within the domestic members to identify common customer infrastructure and the domestic jurisdiction. needs and solutions which can be built The Liquidity Alliance is therefore based on into to the award-winning collateral a model that supports local markets to grow management technology each has and develop their collateral management committed to using. services without extracting domestic assets into an external infrastructure or a custodial This system – Clearstream’s Liquidity Hub GO (or “long box”) model. Future phases will (Global Outsourcing) – went live with Cetip extend cross-border collateral mobilisation in 2011 and is being rolled out with the other in real time. Alliance founding members in the course of 2013. Collaboration between the Liquidity The Liquidity Alliance partners are advancing Alliance partners is not only speeding up quickly in their aim of creating a more the development and roll-out but will also efficient global collateral network that will ensure seamless connectivity leading to a help overcome the problem of fragmentation less fragmented global collateral pool. and so enable a more efficient use of available collateral. Additionally, members will encourage the development of informed research so that The liquidity pool will continue to grow as the Liquidity Alliance becomes a trusted more infrastructures choose to adopt this source of pan-industry information, ideas shared collateral management option and and opinions. The fact that the members to join the Liquidity Alliance. In fact, the are from different regions across the world Liquidity Alliance members look forward brings together a unique pool of global to more institutions coming aboard. The insight and expertise. Liquidity Alliance is open for business. 5 THE REGULATORY LANDSCAPE Navigating seismic changes to the world’s financial industry Politicians and regulators were quick to demand changes to banking procedures after the financial crisis hit in 2008. Risk management became the main priority and an array of new regulations was drafted to ensure more transactions go through clearing houses and an even greater quantity of collateral committed to cover exposures. Basel III, BCBS-IOSCO and the concepts of A major problem for most institutions is mandatory clearing and account segregation that they do not have adequate systems in globally plus the Capital Requirements place to manage their liquidity and available Directive (CRD) IV and the European Market collateral on a real-time and cross-market Infrastructure Regulation (EMIR) in Europe basis. Complex corporate architecture and and the Dodd-Frank Act in the US are international reach means that the majority increasing the pressure and the demand of institutions are unable to have a global for collateral and this continues to cause view across all their positions and collateral concern in much of the worldwide pools. Even if some institutions have a single financial industry. view, they lack the ability to move the right collateral to the right exposure at the right time. 6 A SUstaINABLE SOLUTION TO COMbat THE GLOBAL COllateral CHALLENGE COLLATERAL BECOMES A TOP PRIORITY institutions which tend to work in a compartmentalised way resulting in One of the most significant outcomes of the fragmented, and thereby immobilised, post-crisis regulation wave is that financial parcels of collateral. institutions – and their clients on the buy- side – will be compelled to set aside more A study carried out by Accenture for capital than in the past. The need for more Clearstream in 2011 (see Research section capital leads to a growing need for more on page 19) estimated that up to 15 % of liquidity and collateral throughout the global available collateral in the banking system banking system. was unused. It concluded that the majority of institutions were unable to have a single In particular, the need for high-quality view of their collateral – a single pool – and collateral management has become a top so were unable to ensure their collateral was priority for banks since the collapse of used in the most cost-effective way. Lehman Brothers in 2008 gave rise to a new era in which interbank trust was Indeed, collateral optimisation is now one of severely diminished and the unsecured the biggest challenges faced by institutions – lending market largely disappeared in financial and, increasingly, non-financial – and much of the industrialised world. more and more are looking to their central securities depository to provide this service. Furthermore, the effect of Dodd-Frank in the US, the European Market Infrastructure A partnership APPROACH Regulation (EMIR) in the European Union plus new capital requirements mean that It is against this background that many institutions, both buy-side and sell-side, of the world’s financial infrastructures must collateralise more of their trades have been looking for specialist partners including exposures in the fast-growing which can provide sophisticated and yet OTC derivatives market. Collateral is king, cost-effective and time-efficient collateral not only now but long into the future. management capability. COUNTING THE COST OF This is the background which has led to COLLATERAL INEFFICIENCY the foundation of the Liquidity Alliance, an association of five infrastructures which are Many financial institutions have only just using a common collateral management begun to fully appreciate the high cost system. The Liquidity Alliance is open to of inefficient collateral management. The new partners who are interested in joining problem is widespread and exacerbated and thereby increasing the mutual benefits by the globalised operations of many and opportunities open to all participating institutions and their clients. 1F inancial Times (2012) “EU financial reforms could cost EUR 50bn“, 24 June. 7 ASX Collateral: building world-class, globally-connected infrastructure for Australia By Andrew White, General Manager, Settlement Services, ASX, Australia September 2012 Bulletin, “at present there is around AUD 240 billion outstanding in Commonwealth