Euroclear 2018: Stimulating dialogue and collaboration
27 November 2018
Hot topics at this year鈥檚 Euroclear conference included regulation, repo and leverage, collateral trading, and technology
Image: Shutterstock
This year, delegates gathered in Brussels for Euroclear鈥檚 17th annual collateral conference. The vast majority of delegates hailed from client services and senior management practices from a variety of industry segments.
During the event, panellists discussed a range of topics, including collateral trading, new marketplaces and technology. In one session, many panellists agreed that artificial intelligence (AI) has endless use cases, while other panels created mixed debate, particularly around the subject of SFTR, which some panellists saw as a 鈥榖lessing in disguise鈥�.
In the opening remarks on the first day of the conference, Olivier Grimonpont, global head of collateral management and securities lending, Euroclear and CEO of DTCC-Euroclear global collateral, reinforced this, stating that 鈥渙ur focus every year is about stimulating the industry dialogue and driving market collaboration. And those discussions help us to adapt our services and to remain relevant whilst the industry evolves鈥�.
This year marked the event鈥檚 17th anniversary and Grimonpont noted that many things have changed since its beginning. He said: 鈥淭he most notable difference is that this is no longer just a collateral conference, this is about so much more. This conference now focuses on strategic decisions that we all face or will face. It is about regulation, cyber, blockchain, micro and macroeconomics, politics, geopolitics, and the list goes on. All of which have a direct or indirect impact on the business of collateral.鈥�
He continued: 鈥淭he scope of topics that we address every year continues to expand and this ensures that we, as an industry, continue to have a forum in which we can discuss anything and everything that impacts our business.鈥�
During the course of the two-day event, delegates gathered to partake in panels on collateral trading, repo and leverage, and technology transformation. In a panel on collateral trading, speakers explained that recent regulation has dramatically changed the global collateral management landscape.
Under this wave of regulation, the market has demonstrated its agility and responsiveness by adapting to take advantage of the resulting opportunities.
Panellists explained that moving away from balance sheet intensive trades to new forms of collateral trading such as collateral swaps, and the integration of previously siloed asset classes are two examples of this agility.
Panellists also said there were 鈥渢wo main pressure forces鈥� that were particularly prominent in the past: one, regulatory pressure, and the other, the withdrawal of financial resources from the sell side, which has affected the buy sides鈥� ability to access the market.
One panellist said they 鈥渄on鈥檛 see that pressure coming back any time soon鈥�, but said it was too early to write anything off completely.
In terms of trends, panellists agreed that there was a big trend around efficiencies. One panellist said: 鈥淚n a world where margins are becoming more compressed, there is a big trend that we are seeing around product efficiencies. I expect that trend to continue. The new thing is the relationship with the client.鈥�
鈥淭he burden that is going onto our clients is enormous, and this does not get enough attention. We are equipped to handle these things but clients are tearing their hair out trying to keep up with this,鈥� one speaker said.
The speaker added: 鈥淭he sell side is being constrained for various reasons. Unless a sweep of solutions is made available for clients, I think this is going to be a serious problem.鈥�
Additionally, the panellist drew upon the idea that 鈥榗lients are being de-marketed鈥� and said as the pressure on financial resources increases, this will continue to be an ongoing issue.
This panel was followed by a Euroclear update, where Brexit was a hot topic. Naming it the elephant in the room, one speaker remarked: 鈥淲e have no choice but to prepare for the worst case scenario.鈥�
鈥淪pecifically for collateral management this could mean a migration of up to 2,500 contracts pairs in up to 20 UK entities. In order to be ready for those kinds of volumes, I urge you to engage with us and confirm with your clients as soon as possible before the deadline so we can all work together on a viable plan.鈥�
In the following session, panellists discussed repo and leverage. One said leverage as a financial system includes not only the banks leverage but the systems leverage.
The speaker added: 鈥淭he databases that people use do not pick up leverage completely. One of the topics of today is leverage and it is not being picked up via download. The other headline topic is repo, and repo is not the only flaw of collateral, there are other flaws of collateral if you are talking about securities finance transactions and these are significantly from the hedge fund prime brokerage.鈥�
The second panellist summarised: 鈥淟everage, the topic and the rhetoric is not accurately identified and regarding repo, you cannot get the full picture of repo through collateral.鈥�
The first panellist added: 鈥淲here we are concerned about leverage is in collateral transactions. In a crisis time, if a chain is corrupted then experience shows the problem gets multiplied.鈥�
He said: 鈥淲e have to weigh the short term with the social losses if things go wrong. Therefore, I would say let鈥檚 be careful. I agree that we do not see all leverage but at least with the one we can see and can limit, I would say that in this space we should be careful in posting collaterals unless you have enough buffer.鈥�
The other speaker explained: 鈥淟iquidity has done a fantastic job, but we need leverage ratio because of the capital side. We have tried to look at these numbers for 10 years now and there is something fundamental here. Some collateral will remain good and some will lose value.鈥�
Another panellist added: 鈥淟everage ratio is not perfect but there is not much point tinkering with it. Repo is not the only issue in leverage and we make the mistake of focusing on it too much鈥攂ut don鈥檛 forget about it.鈥�
Meanwhile, in a panel on technology, one panellist said that AI produces immediate gains, potential in the value of its services, potential revenue and doesn鈥檛 require any industry-wide collaboration.
The panel looked at some of the developments that showcase the future uses of technology in the industry, with one speaker noting that over the past few years technology has been affecting lives like never before.
One panellist questioned the reasonable timeframe for execution of technology and in response, another speaker said: 鈥淣obody has a crystal ball. It is really hard to generalise, so you cannot say that all institutions have the same technology programme, there is a diversity out there and the crystal ball doesn鈥檛 give one answer for the whole group.鈥�
Panellists explained that technology has been subject to a lot of hype over recent years, and one said that technology at the moment is not fully stabilised yet. The panellist said: 鈥淎doption will take time, it requires collaboration across the industry and this will take time. There will be a lot of initiatives, there will also be a lot of scrutinies.鈥�
Discussing data, a panellist commented: 鈥淵ou need data for AI because without it and without the transparency of logic, you will get flaws and biases as a result. On top of that, you need a robust set of application interfaces, in order to survive in the market, you need to move from a pipeline to something more platform-like.鈥�
In terms of challenges, one speaker observed: 鈥淭here is a lot of resistance and questions which need to be addressed. The cost of migration is huge. Cost-effectiveness and user friendlies are good but the most important is security.鈥�
鈥淎 lot of regulators have access to a bulk of data, for example, the passport member of everyone trading UK security, which leaves a cyber risk of that data there.The problem with cloud and regulators is the cloud providers. The regulators want audit rights and the cloud providers won鈥檛 give them that yet. I don鈥檛 think new regulations should be made for fintech. Regulators need to cooperate a lot more globally to get a reduction in risk.鈥�
During the event, panellists discussed a range of topics, including collateral trading, new marketplaces and technology. In one session, many panellists agreed that artificial intelligence (AI) has endless use cases, while other panels created mixed debate, particularly around the subject of SFTR, which some panellists saw as a 鈥榖lessing in disguise鈥�.
In the opening remarks on the first day of the conference, Olivier Grimonpont, global head of collateral management and securities lending, Euroclear and CEO of DTCC-Euroclear global collateral, reinforced this, stating that 鈥渙ur focus every year is about stimulating the industry dialogue and driving market collaboration. And those discussions help us to adapt our services and to remain relevant whilst the industry evolves鈥�.
This year marked the event鈥檚 17th anniversary and Grimonpont noted that many things have changed since its beginning. He said: 鈥淭he most notable difference is that this is no longer just a collateral conference, this is about so much more. This conference now focuses on strategic decisions that we all face or will face. It is about regulation, cyber, blockchain, micro and macroeconomics, politics, geopolitics, and the list goes on. All of which have a direct or indirect impact on the business of collateral.鈥�
He continued: 鈥淭he scope of topics that we address every year continues to expand and this ensures that we, as an industry, continue to have a forum in which we can discuss anything and everything that impacts our business.鈥�
During the course of the two-day event, delegates gathered to partake in panels on collateral trading, repo and leverage, and technology transformation. In a panel on collateral trading, speakers explained that recent regulation has dramatically changed the global collateral management landscape.
Under this wave of regulation, the market has demonstrated its agility and responsiveness by adapting to take advantage of the resulting opportunities.
Panellists explained that moving away from balance sheet intensive trades to new forms of collateral trading such as collateral swaps, and the integration of previously siloed asset classes are two examples of this agility.
Panellists also said there were 鈥渢wo main pressure forces鈥� that were particularly prominent in the past: one, regulatory pressure, and the other, the withdrawal of financial resources from the sell side, which has affected the buy sides鈥� ability to access the market.
One panellist said they 鈥渄on鈥檛 see that pressure coming back any time soon鈥�, but said it was too early to write anything off completely.
In terms of trends, panellists agreed that there was a big trend around efficiencies. One panellist said: 鈥淚n a world where margins are becoming more compressed, there is a big trend that we are seeing around product efficiencies. I expect that trend to continue. The new thing is the relationship with the client.鈥�
鈥淭he burden that is going onto our clients is enormous, and this does not get enough attention. We are equipped to handle these things but clients are tearing their hair out trying to keep up with this,鈥� one speaker said.
The speaker added: 鈥淭he sell side is being constrained for various reasons. Unless a sweep of solutions is made available for clients, I think this is going to be a serious problem.鈥�
Additionally, the panellist drew upon the idea that 鈥榗lients are being de-marketed鈥� and said as the pressure on financial resources increases, this will continue to be an ongoing issue.
This panel was followed by a Euroclear update, where Brexit was a hot topic. Naming it the elephant in the room, one speaker remarked: 鈥淲e have no choice but to prepare for the worst case scenario.鈥�
鈥淪pecifically for collateral management this could mean a migration of up to 2,500 contracts pairs in up to 20 UK entities. In order to be ready for those kinds of volumes, I urge you to engage with us and confirm with your clients as soon as possible before the deadline so we can all work together on a viable plan.鈥�
In the following session, panellists discussed repo and leverage. One said leverage as a financial system includes not only the banks leverage but the systems leverage.
The speaker added: 鈥淭he databases that people use do not pick up leverage completely. One of the topics of today is leverage and it is not being picked up via download. The other headline topic is repo, and repo is not the only flaw of collateral, there are other flaws of collateral if you are talking about securities finance transactions and these are significantly from the hedge fund prime brokerage.鈥�
The second panellist summarised: 鈥淟everage, the topic and the rhetoric is not accurately identified and regarding repo, you cannot get the full picture of repo through collateral.鈥�
The first panellist added: 鈥淲here we are concerned about leverage is in collateral transactions. In a crisis time, if a chain is corrupted then experience shows the problem gets multiplied.鈥�
He said: 鈥淲e have to weigh the short term with the social losses if things go wrong. Therefore, I would say let鈥檚 be careful. I agree that we do not see all leverage but at least with the one we can see and can limit, I would say that in this space we should be careful in posting collaterals unless you have enough buffer.鈥�
The other speaker explained: 鈥淟iquidity has done a fantastic job, but we need leverage ratio because of the capital side. We have tried to look at these numbers for 10 years now and there is something fundamental here. Some collateral will remain good and some will lose value.鈥�
Another panellist added: 鈥淟everage ratio is not perfect but there is not much point tinkering with it. Repo is not the only issue in leverage and we make the mistake of focusing on it too much鈥攂ut don鈥檛 forget about it.鈥�
Meanwhile, in a panel on technology, one panellist said that AI produces immediate gains, potential in the value of its services, potential revenue and doesn鈥檛 require any industry-wide collaboration.
The panel looked at some of the developments that showcase the future uses of technology in the industry, with one speaker noting that over the past few years technology has been affecting lives like never before.
One panellist questioned the reasonable timeframe for execution of technology and in response, another speaker said: 鈥淣obody has a crystal ball. It is really hard to generalise, so you cannot say that all institutions have the same technology programme, there is a diversity out there and the crystal ball doesn鈥檛 give one answer for the whole group.鈥�
Panellists explained that technology has been subject to a lot of hype over recent years, and one said that technology at the moment is not fully stabilised yet. The panellist said: 鈥淎doption will take time, it requires collaboration across the industry and this will take time. There will be a lot of initiatives, there will also be a lot of scrutinies.鈥�
Discussing data, a panellist commented: 鈥淵ou need data for AI because without it and without the transparency of logic, you will get flaws and biases as a result. On top of that, you need a robust set of application interfaces, in order to survive in the market, you need to move from a pipeline to something more platform-like.鈥�
In terms of challenges, one speaker observed: 鈥淭here is a lot of resistance and questions which need to be addressed. The cost of migration is huge. Cost-effectiveness and user friendlies are good but the most important is security.鈥�
鈥淎 lot of regulators have access to a bulk of data, for example, the passport member of everyone trading UK security, which leaves a cyber risk of that data there.The problem with cloud and regulators is the cloud providers. The regulators want audit rights and the cloud providers won鈥檛 give them that yet. I don鈥檛 think new regulations should be made for fintech. Regulators need to cooperate a lot more globally to get a reduction in risk.鈥�
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