Mixed opinions
05 February 2019
Delegates had a mixed bag of opinions during panel sessions at this year鈥檚 GFF conference in Luxembourg, namely on technology drivers, disruptors, and HQLA
Image: Shutterstock
Delegates had a mixed bag of opinions during panel sessions at this year鈥檚 GFF conference in Luxembourg, namely on technology drivers, disruptors, and HQLA Delegates gathered in snowy Luxembourg for the Global Fund and Financing (GFF) Summit conference at the end of January. Panels and presentations focused on repo and securities lending markets, technology drivers in the industry, as well as the role of the central clearing counterparty (CCP) in evolving market structures. There was a mixed bag of opinions regarding whether or not technology is disrupting in the industry and whether it is being leveraged to its full potential. The conference combined the expertise of Clearstream, Eurex Clearing and Eurex Repo, all part of Deutsche B枚rse Group.
The conference brought together the experience of leading market players, who provided insight into current industry developments. Industry delegates at the conference were encouraged to interact in polls, with one poll asking delegates 鈥淲hich phase of Uncleared Margin Requirements (UMR), is your organisation subject to?鈥�. Some 34 percent said they were already exchanging while some 36 percent said they did not know yet [see figure one].
During a presentation on the role of CCPs in evolving market structures, Erik M眉ller, CEO of Eurex Clearing, said the industry needs to come up with better answers to overcome some of the restrictions regarding access to CCPs.
Discussing what makes a CCP useful and unique, M眉ller said: 鈥淐CPs are useful because there are five unique concepts that make the CCP special. Through inserting the CCP between two counterparties, you have the ability to net exposures鈥攁 high degree of netting efficiency that is introduced to the system (95 plus percent).鈥�
Onto the 鈥楤鈥� word (Brexit), M眉ller stressed that Brexit is important in the CCP world. He commented: 鈥淚n London and the EU 27, there are worries about the possibilities accessing clearinghouses going forward. There are emergency rules being put in place but clients are asked by regulators to prepare for all scenarios and emergency rules are temporary in nature.鈥�
Technology was a hot topic at the conference, and in a panel discussion entitled, 鈥淚s new technology really driving the creation of new business models in the financial industry?鈥�, panellists attempted to answer whether new technology is driving the creation of new business models in the financial industry.
During this panel, panellists looked at some use cases such as tokenisation or digitisation of assets, the impact of the legal environment, and software landscape. They also discussed their own compliance experiences and shared views on upcoming industry challenges and provided insights from different perspectives.
Guido Stroemer, founding partner at HQLAx, said: 鈥淭otal transformation of business models takes a long time, and successful innovation is all about fostering market adoption by delivering incremental, tangible wins to end users. You need a great use case, you need great technology, and most importantly you need people who are willing to embrace new technology and new operating models.鈥�
He added: 鈥淭his industry is a people鈥檚 business and people have to want to enact change. Clearstream is the first mover for connecting to the HQLAx platform, and we are looking forward to collaborating with other major tri-party agents in Europe to help foster market adoption of a new operating model for collateral upgrades.鈥�
Jens Hachmeister, managing director, distributed ledger technology (DLT), crypto assets and new market structures, Deutsche B枚rse, said: 鈥淚n our industry, the main drivers for change are regulation and technology. Technology is a catalyst for change. However, before new technologies can unfold their full potential, there needs to be a clear value proposition. New technologies do not provide a value in itself but they are rather an enabler for new business opportunities.鈥�
The moderator, Philippe Seyll, then asked panellists the following question: 鈥淚n Deutsche B枚rse, we say to create an ecosystem that works takes would take about six years. Is the capital markets ready for the full adoption and is the usage of new technology going to shorten the market adoption?鈥�
In response, Hachmeister said: 鈥淚 think this is a bold statement. We have to bear in mind that the current market infrastructure has been created over decades and right now this is being challenged by new technologies. We need to have the technology at the stage where it is really applicable on a large scale. We have seen a lot of progress here over the last 12 months.鈥�
He added: 鈥淲e need catalysts like fintechs to challenge existing market infrastructures. We need regulators who are open and embrace new technologies to make these transformations happen. Most of the regulators are open to these new technological developments but still need to find a way to keep up with the high pace. These components need to be mobilised at the same time to make this transformation successful.鈥�
Discussing blockchain, Hachmeister cited: 鈥淏lockchain in the short term is overhyped but in long term probably underhyped. Now we are entering into a new world of digital assets representing what we recognise as financial instruments today. The serious players in the industry will start to come up with a solid market infrastructure for digital assets. Once we have a digital representative of any kind of asset on the one hand and a comprehensive infrastructure for these digital assets on the other hand, we are really opening up to a whole new era of financial markets.鈥�
Hachmeister continued: 鈥淚f we move from a centralised to a decentralised infrastructure we still need the element of trust especially with regard to gatekeeping, setting the rules and standards, issuing assets, providing know-your-customer (KYC) and anti-money laundering (AML) solutions as well as operating and orchestrating the decentralised networks. Decentralised market infrastructure needs to be built on a trusted network environment. Our current thinking is that permissioned solutions do the trick here rather than unpermissioned solutions. In general, trust cannot be outsourced to technology but needs to be provided by an experienced and reliable third party.鈥�
Another panellist, David Treat, managing Director, global head of capital markets blockchain practice, Accenture, commented: 鈥淥ver the years, we have used technology to make things electronic, faster, and automated, but we largely left the underlying business processes the same. Now for the first time, through the use of DLT, we are able to change the business model itself, eliminating work instead of just making it faster.鈥�
Treat also noted: 鈥淭he financial services industry has been all about moving assets from sellers to buyers, but one of the things that is a characteristic of the digital world is that you don鈥檛 have to actually move the asset like you did when it was paper. One of the special aspects about DLT is that we can operate in the digital world with the certainty that we have in the physical world. We now have the ability to change the owner of the asset without actually having to move it from one company鈥檚 database to another鈥檚 through a shared data system.鈥�
Panel at GFF Summit saw panellists discuss high-quality liquid assets (HQLA) in the value chain. This panel explored the impacts of regulatory change on the collateral landscape looking at the shift from cash to non-cash collateral alongside the increase of complexity with the introduction of buy- and sell-side entrants into the market.
Discussing supply and demand, some 27 percent of delegates said that over the next two years, the demand for high-quality liquid assets (HQLA) in the value chain will significantly increase. A further 56 percent said that it will increase, while some 13 percent predicted that it will remain the same and 3 percent think that it will decrease [see figure two].
In terms of supply, some 4 percent of delegates said that the supply of HQLA will significantly increase over the next two years. This compares to 44 percent who voted that it would increase, while 31 percent said that it would remain the same, and 19 percent said it would decrease [see figure three].
Of these results, Paul van de Moosdijk, senior treasury manager, PGGM, said: 鈥淗QLA is not a primary concern and it is not a topic that we discuss on a day-to-day basis. The primary concern is the transformation of HQLA to cash especially where mandatory clearing come into play.鈥�
Moosdijk added: 鈥淧riority is on clearing and cash variation margining, we still believe that the repo market will become dysfunctional in extreme market conditions. We try to optimise solutions in the market, without having access to central bank money. We have added Eurex pooling and we have an additional tool to transfer high-quality assets into cash.鈥�
The moderator then asked panellists what they saw last year, specifically in the collateral space, of this one speaker commented: 鈥淭here is separation by region; in the US we saw more volatility in pricing and supply with the first half of the year starting off with definitively increasing demand compared to other regions.鈥�
鈥淎s we move across the globe to Europe we saw a very different story, we saw spread compression. Looking at Japan, there was more supply than there is demand in that space and we are seeing that connectivity between the sourcing and the use. There is plenty of supply but it is about being able to recycle that into processes.鈥�
In terms of client trends, one speaker noted: 鈥淲hat I am seeing from my clients is quite interesting. We see clients sitting on the fence of HQLA and asking how they can get value out of it.鈥�
鈥淭here is also an increasing amount of focus on monetisation of HQLA. As they have seen the amount of collateral levels increase they have focused very closely on the buy side on their ability on monetisation and how they would abstract the value in stress.鈥�
Concluding the day in his closing remarks, Fran莽ois Masquelier, senior vice president, head of treasury and enterprise risk management, RTL Group, chairman of Luxembourg association for corporate treasurers, said: 鈥淲e are in a world of digital transformation and an ever-growing demand for regulatory compliance. Today we had some intense sessions as panellists addressed topics in the industry that we are all facing indirectly or directly.鈥�
鈥淲e realise that since the buy-side have suddenly come in and addressed common problems, we are working more closely together.鈥�
鈥淣etworking at conferences like this is important for sharing ideas and views, and ultimately so that we can co-create a solution on using innovation more effectively, managing the funding and financing industry in a world with increasing regulatory demands, and this was the first thing we addressed today.鈥�
鈥淭he market in Europe remains fragmented but we should work to defragment it to create an efficient market.鈥�
The conference brought together the experience of leading market players, who provided insight into current industry developments. Industry delegates at the conference were encouraged to interact in polls, with one poll asking delegates 鈥淲hich phase of Uncleared Margin Requirements (UMR), is your organisation subject to?鈥�. Some 34 percent said they were already exchanging while some 36 percent said they did not know yet [see figure one].
During a presentation on the role of CCPs in evolving market structures, Erik M眉ller, CEO of Eurex Clearing, said the industry needs to come up with better answers to overcome some of the restrictions regarding access to CCPs.
Discussing what makes a CCP useful and unique, M眉ller said: 鈥淐CPs are useful because there are five unique concepts that make the CCP special. Through inserting the CCP between two counterparties, you have the ability to net exposures鈥攁 high degree of netting efficiency that is introduced to the system (95 plus percent).鈥�
Onto the 鈥楤鈥� word (Brexit), M眉ller stressed that Brexit is important in the CCP world. He commented: 鈥淚n London and the EU 27, there are worries about the possibilities accessing clearinghouses going forward. There are emergency rules being put in place but clients are asked by regulators to prepare for all scenarios and emergency rules are temporary in nature.鈥�
Technology was a hot topic at the conference, and in a panel discussion entitled, 鈥淚s new technology really driving the creation of new business models in the financial industry?鈥�, panellists attempted to answer whether new technology is driving the creation of new business models in the financial industry.
During this panel, panellists looked at some use cases such as tokenisation or digitisation of assets, the impact of the legal environment, and software landscape. They also discussed their own compliance experiences and shared views on upcoming industry challenges and provided insights from different perspectives.
Guido Stroemer, founding partner at HQLAx, said: 鈥淭otal transformation of business models takes a long time, and successful innovation is all about fostering market adoption by delivering incremental, tangible wins to end users. You need a great use case, you need great technology, and most importantly you need people who are willing to embrace new technology and new operating models.鈥�
He added: 鈥淭his industry is a people鈥檚 business and people have to want to enact change. Clearstream is the first mover for connecting to the HQLAx platform, and we are looking forward to collaborating with other major tri-party agents in Europe to help foster market adoption of a new operating model for collateral upgrades.鈥�
Jens Hachmeister, managing director, distributed ledger technology (DLT), crypto assets and new market structures, Deutsche B枚rse, said: 鈥淚n our industry, the main drivers for change are regulation and technology. Technology is a catalyst for change. However, before new technologies can unfold their full potential, there needs to be a clear value proposition. New technologies do not provide a value in itself but they are rather an enabler for new business opportunities.鈥�
The moderator, Philippe Seyll, then asked panellists the following question: 鈥淚n Deutsche B枚rse, we say to create an ecosystem that works takes would take about six years. Is the capital markets ready for the full adoption and is the usage of new technology going to shorten the market adoption?鈥�
In response, Hachmeister said: 鈥淚 think this is a bold statement. We have to bear in mind that the current market infrastructure has been created over decades and right now this is being challenged by new technologies. We need to have the technology at the stage where it is really applicable on a large scale. We have seen a lot of progress here over the last 12 months.鈥�
He added: 鈥淲e need catalysts like fintechs to challenge existing market infrastructures. We need regulators who are open and embrace new technologies to make these transformations happen. Most of the regulators are open to these new technological developments but still need to find a way to keep up with the high pace. These components need to be mobilised at the same time to make this transformation successful.鈥�
Discussing blockchain, Hachmeister cited: 鈥淏lockchain in the short term is overhyped but in long term probably underhyped. Now we are entering into a new world of digital assets representing what we recognise as financial instruments today. The serious players in the industry will start to come up with a solid market infrastructure for digital assets. Once we have a digital representative of any kind of asset on the one hand and a comprehensive infrastructure for these digital assets on the other hand, we are really opening up to a whole new era of financial markets.鈥�
Hachmeister continued: 鈥淚f we move from a centralised to a decentralised infrastructure we still need the element of trust especially with regard to gatekeeping, setting the rules and standards, issuing assets, providing know-your-customer (KYC) and anti-money laundering (AML) solutions as well as operating and orchestrating the decentralised networks. Decentralised market infrastructure needs to be built on a trusted network environment. Our current thinking is that permissioned solutions do the trick here rather than unpermissioned solutions. In general, trust cannot be outsourced to technology but needs to be provided by an experienced and reliable third party.鈥�
Another panellist, David Treat, managing Director, global head of capital markets blockchain practice, Accenture, commented: 鈥淥ver the years, we have used technology to make things electronic, faster, and automated, but we largely left the underlying business processes the same. Now for the first time, through the use of DLT, we are able to change the business model itself, eliminating work instead of just making it faster.鈥�
Treat also noted: 鈥淭he financial services industry has been all about moving assets from sellers to buyers, but one of the things that is a characteristic of the digital world is that you don鈥檛 have to actually move the asset like you did when it was paper. One of the special aspects about DLT is that we can operate in the digital world with the certainty that we have in the physical world. We now have the ability to change the owner of the asset without actually having to move it from one company鈥檚 database to another鈥檚 through a shared data system.鈥�
Panel at GFF Summit saw panellists discuss high-quality liquid assets (HQLA) in the value chain. This panel explored the impacts of regulatory change on the collateral landscape looking at the shift from cash to non-cash collateral alongside the increase of complexity with the introduction of buy- and sell-side entrants into the market.
Discussing supply and demand, some 27 percent of delegates said that over the next two years, the demand for high-quality liquid assets (HQLA) in the value chain will significantly increase. A further 56 percent said that it will increase, while some 13 percent predicted that it will remain the same and 3 percent think that it will decrease [see figure two].
In terms of supply, some 4 percent of delegates said that the supply of HQLA will significantly increase over the next two years. This compares to 44 percent who voted that it would increase, while 31 percent said that it would remain the same, and 19 percent said it would decrease [see figure three].
Of these results, Paul van de Moosdijk, senior treasury manager, PGGM, said: 鈥淗QLA is not a primary concern and it is not a topic that we discuss on a day-to-day basis. The primary concern is the transformation of HQLA to cash especially where mandatory clearing come into play.鈥�
Moosdijk added: 鈥淧riority is on clearing and cash variation margining, we still believe that the repo market will become dysfunctional in extreme market conditions. We try to optimise solutions in the market, without having access to central bank money. We have added Eurex pooling and we have an additional tool to transfer high-quality assets into cash.鈥�
The moderator then asked panellists what they saw last year, specifically in the collateral space, of this one speaker commented: 鈥淭here is separation by region; in the US we saw more volatility in pricing and supply with the first half of the year starting off with definitively increasing demand compared to other regions.鈥�
鈥淎s we move across the globe to Europe we saw a very different story, we saw spread compression. Looking at Japan, there was more supply than there is demand in that space and we are seeing that connectivity between the sourcing and the use. There is plenty of supply but it is about being able to recycle that into processes.鈥�
In terms of client trends, one speaker noted: 鈥淲hat I am seeing from my clients is quite interesting. We see clients sitting on the fence of HQLA and asking how they can get value out of it.鈥�
鈥淭here is also an increasing amount of focus on monetisation of HQLA. As they have seen the amount of collateral levels increase they have focused very closely on the buy side on their ability on monetisation and how they would abstract the value in stress.鈥�
Concluding the day in his closing remarks, Fran莽ois Masquelier, senior vice president, head of treasury and enterprise risk management, RTL Group, chairman of Luxembourg association for corporate treasurers, said: 鈥淲e are in a world of digital transformation and an ever-growing demand for regulatory compliance. Today we had some intense sessions as panellists addressed topics in the industry that we are all facing indirectly or directly.鈥�
鈥淲e realise that since the buy-side have suddenly come in and addressed common problems, we are working more closely together.鈥�
鈥淣etworking at conferences like this is important for sharing ideas and views, and ultimately so that we can co-create a solution on using innovation more effectively, managing the funding and financing industry in a world with increasing regulatory demands, and this was the first thing we addressed today.鈥�
鈥淭he market in Europe remains fragmented but we should work to defragment it to create an efficient market.鈥�
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