The ESES CSDs originally intended to transfer their settlement services to T2S in March 2016, however the firm will now reassess its schedule and clarify the new timetable in the coming weeks.

Euroclear operates six CSDs serving seven European markets and was set to migrate its France, Belgium and Netherlands platforms to the new European securities settlement engine early next year.

“We remain fully committed to the T2S project and continue to work closely with the ECB, the CSD community and our clients to evaluate possible alternative migration scenarios, in order to minimise the impact of this delay,” said Euroclear in a statement.

“We continue to dedicate all available resources and expertise to ESES’ T2S migration project, and we remain committed to the safety, stability and resiliency of the marketplace.”

Euroclear’s CSDs signed the T2S Framework Agreement in June 2012 with its plan to outsource matching and settlement services to T2S, but will continue to directly offer all custody and other services to their clients.

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The buy-side should be securing clearing brokers and getting their collateral management processes in place before it’s too late, according to panelists at this year’s Sibos event in Singapore.

Dismissing the outdated theme of a collateral shortfall which have dominated conversation in recent years, panelists said the focus is not in practical implementation.

“You shouldn’t underestimate how long it takes to get on with a clearing member,” said Gerard Smith, director collateral services, LCH.CLearnet. “If you are thinking about leaving it to the last minute that is not a good idea.”

Outside of the major institutions, many buy-side firms aren’t beginning to clear before mandates come into force late in 2016. Many are also yet to secure a clearing broker, with it now becoming an uphill task as banks are less able to onboard clients due to balance sheet restraints stemming regulations.

“European clearing members, the balance sheets are full,” said Alison King, head of product and platform delivery, SGX. “When we speak to buy-side clients and tier two banks, they are really struggling to find clearing brokers to take them on.”

If the experience in the US –where clearing came into force in 2013 – is anything to go by, the majority of buy-side firms will wait until they have to before beginning clearing.

Around the same time as these clearing mandates, increased margin requirements for non-cleared OTC derivatives will come into force, causing a significant spike in the amount of collateral the buy-side will need to post.

Once again, the message from the sell-side panel was for buy-siders to have their collateral management processes in place, whether it be outsourced or in house, in time for the regulatory crunch in 2016.

“The problem on the buy-side which is much less around optimization,” said Jo Van de Velde, head of the product management division at Euroclear. “Their problem is around clockwork, this is still a very manual process. If tomorrow mandatory clearing gets in through CCPs, you’re talking about daily margin costs, intra-day costs, dispute management, all that today is done over a couple of days but tomorrow it will be clockwork.”

“That is about straight through procession, and if you look at the sheer volume of margin costs that are going to be caught up in this new regulation, if you don’t have a solution, you don’t play anymore.

“Collateral used to be around financing and sell-side driven, but today it is very much risk oriented, collateral management has become like electricity and if you’re not connected to the wires you will not play.”

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The T+2 Industry Steering Committee (T+2 ISC) has welcomed comments by the Securities and Exchange Commission’s (SEC) Chair Mary Jo White supporting a migration to a T+2 settlement cycle in the US.

In a letter to Kenneth Bentsen Jr, president and CEO of the Securities Industry and Financial Markets Association (SIFMA) and Paul Schott Stevens, president and CEO of the Investment Company Institute (ICI), Chair White expressed her support for shortening the US settlement time-frame from T+3 to T+2.

This comes following a paper by the T+2 ISC, advocating the introduction of T+2 by the third quarter of 2017 subject to obtaining regulatory support. SEC commissioners Mike Piwowar and Kara Stein issued a statement of support shortly after the publication of the white paper.   

“Obtaining regulatory support for the move to T+2 is critical and we applaud the SEC for their leadership and support in this major initiative to strengthen our financial system,” said Tom Price, co-chair of the ISC, and Managing Director, Operations, Technology & Business Continuity Planning, SIFMA.

The ISC said shortening the settlement cycle would foster greater certainty, safety and soundness in the US capital markets. It said it would reduce counterparty risk as well as pro-cyclical margin and liquidity demand across the industry, and would promote global harmonization in securities settlement cycles.  In its letter, the SEC said it recognized these risk-mitigating benefits of the initiative. 

“Moving to a shorter settlement cycle will help improve the overall efficiency of securities markets, align the United States with other global markets and promote financial stability,” said Marty Burns, co-chair of the ISC and Chief Industry Operations Officer, ICI.

The migration to T+2 comes as more than two dozen European markets migrated onto T+2 in fall 2014, driven in part by the imminent implementation of the EU’s Central Securities Depository Regulation (CSDR), which will introduce a shortened trade settlement cycle. Australia’s ASX is also hoping to move from T+3 to T+2 for cash equities by March 2016.

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As the financial industry continues to tackle the challenge of collateral management it is only natural for a range of solutions to be touted as the ‘savior’ of said troubles.

One such phenomenon is blockchain, the cryptographic ledger system stemming from the Bitcoin revolution and heralded by many in the industry as there future of finance.

Blockchain is a chronological order of all Bitcoin transactions recorded in a public ledger in order to keep track of records. It is decentralisted, allows quick transactions and allows people to send Bitcoin in a cheaper way than you can send most currencies.  

So this technology has sparked interest, especially in the banking world. You’d be hard pushed to find a major financial institution that hasn’t begun looking into blockchain technology, while many have made substantial investments. Santander, UBS and Goldman Sachs are just a few who have been public about their blockchain ventures.

Now let’s look at the issues surrounding post-financial crisis collateral requirements. The movement, cost and availability of collateral headlines the market’s worries, so could the transparency, cost efficiency and speed of blockchain technology help?

“The decentralised ledger process and the immediate nature of transaction processing would certainly bring a lot of efficiency to collateral management,” says Philippe Ruault, head of solutions for settlement, clearing and custody, BNP Paribas Securities Services. “We think blockchain has the potential to make processes more efficient and faster.” 

New regulations are forcing major changes and advancements in the collateral world. The requirements for increased margins and the central clearing of OTC derivatives have spurred new technologies and offerings across the market.

The door is open for new solutions and technology providers to capture market share and this has led to much industry discussion and collaboration. So could blockchain be the answer to the industry’s problems?

A study co-authored by Santander this year predicted that blockchain technology could cut $15bn-$20bn a year from banks’ infrastructure costs.

“An interesting application of this could be around enhancing the velocity of movement of securities, enabling financial institutions to mobilise collateral to back up their trades more quickly,” adds Ruault.

“The blockchain comes with additional characteristics such as traceability, or the option to hardwire conditions into transactions, which have interesting applications to the concept of collateral management.”

BNP Paribas is just one of the custodians looking into this technology, others who have been vocal are Deutsche Bank, SIX Securities and also collateral management provider the Depository Trust and Clearing Corporation (DTCC).

“Collateral management is a critical topic now because the volumes of business at stake are huge, new regulations are introducing increasing complexity, and new technologies are on the cusp of disrupting the processes that enable the market,” Ruault continues.

“While this technology is exciting, it is still in its infancy. It is too early to say whether it is scalable enough/cheap enough to be implemented on a wide scale. We have a number of proofs of concept in the works, all centred around how blockchain technology could be integrated into our core infrastructure.

“The idea is to assess how this technology could be integrated into the core infrastructure of a custodian to facilitate the movement of securities and their safety. We are at an exploratory stage - the legal, risk and even technology environments are currently not production ready.”

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EuroCCP is to begin clearing trades on London Stock Exchange (LSE) later this month, meaning market participants will now be able to choose from all three of Europe’s interoperable central counterparties (CCPs).

In May this year the two firms confirmed they would be working together to offer additional clearing choice to LSE members after technical and legal considerations had been resolved.

EuroCCP will join LCH.Clearnet and SIX x-Clear in providing clearing for London Stock Exchange equity trades from 26 October.

Currently, members using the LSE Customer Development Service are able to use EuroCCP’s participant code EMCFNL2A to test connectivity.

Following May’s announcement, EuroCCP CEO Diana Chan said the move will bring increased competition and reduced costs to UK equity trading and enable market participants to benefit from increased netting capabilities.

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The New Zealand Stock Exchange will move to a T+2 settlement cycle on 7 March, the same day as Australia, according to a briefing by the Depository Trust & Clearing Corporation (DTCC).

New Zealand will move cash equities and fixed income vehicles at the same time in March, mirroring Australia’s move to bring in a T+2 settlement cycle, according to Matt Chan, head of business strategy at DTCC’s institutional services. Chan, who is based in Sydney, briefed partcipants on T+2 developments at a webinar this week.

ASX Group and NZX are working together to harmonise the process of moving from a T+3 settlement cycle to a T+2 settlement cycle. ASX is coordinating the move around cash equities, while the Australian Financial Markets Association (AFMA) is coordinating debt instruments. NZX is coordinating both cash equity and debt markets transitions, covering the NZX main board, the debt market, the alternative market, the NXT market and the Fonerra Shareholders Market, Chan says.

There have been some changes to the timing of the settlement cycle as the consultation process with industry has gone on – the settlement cut-off has been established as 11.30 a.m., but final payment settlement will be at 2.30 p.m., Chan notes. 

“The ASX is doing a pretty good job in terms of their communication, and they have very various publications that they have put out in terms of checklists and other documentation,” Chan said. “There is a market implementation group that’s meeting once every quarter. We have participated in some of those and presented from a DTCC perspective. I’d encourage folks to also participate in those.”

In the lead-up to the launch of T+2 in Australia and New Zealand, the focus will be on understanding and harmonising matching processes and minimising STP fail rates. Trade participants should be seeking to confirm on the trade date if possible, to streamline the downstream processes and give a time buffer to manage mismanaged trades, Chan says.

A second issue is around standing settlement instructions (SSI). In addition to same-day trade affirmation, one of the ways to minimise mismatches is to put SSI information into trades, he explains.

AFMA is calling on participants in Australia’s debt markets to attest to their readiness for T+2 by December, Chan said.

“They will need to say to AFMA that they’re ready to make the change in March,” Chan said. “AFMA is looking to be in the position to communicate that back to regulators to make sure that everyone is on the same page and comfortable.”

Singapore is considering a move to T+2 in 2016 as well, but there has been less communication from regulators there regarding that transition, Chan said. Japan is looking at transitioning to T+2 in 2017, he added.

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Searching for your clearing broker used to be much like strolling down a long stretch of restaurants in your favourite holiday destination. Everyone desperately wants you to come in and dine with them, meaning you weigh each option up carefully before gracing the most appealing with your business.

Those days are now over for many buy-side firms, thanks to a new set of regulations targeting the balance sheets of banks. The process has now become more like trying to gain membership to an exclusive and very selective club, and even once you have secured that coveted entry you may yet be kicked back out again in the near future.

Many of the largest brokers and futures commission merchants (FCMs) – as they are referred to in the US – are now cherry picking their clients in light of the stringent regulations they now face. It’s not a decision they are happily making, it is a result of new rules such as the leverage ratio and other ways global watchdogs are looking at reducing systemic risk in the banking system.

Even though these regulations target banks, the knock-on effect on the brokerage finance models has hit the buy-side. The leverage ratio reduces available balance sheet commitments for client business, making it hard for them to take on too much risk from clients.

This pressure has forced them to look more precisely at the fit of each buy-side firm’s risk profile and how it will impact their own balance sheet.

Every buy-side firm is different in this case, depending on its size and derivatives appetite, but with clearing mandates on the horizon, many are looking for a clearing broker, whether it be their first, second or third.

What you need to be looking for

So in light of these wholesale changes and the on-going window shopping, what do the buy-side need to look for in their provider when aiming to find the perfect match?

Well to begin with there are some essentials as ensuring there are robust systems in place, the right business commitment and of course the price they are charging. Considering the severity of new regulations there are also many questions around risk and collateral that the buy-side will have for their potential suitors.

Hannah Meakin, partner in the financial services team at Norton Rose Fulbright, says that the clearing brokers should also be able to explain clearly the choice of accounts and the different levels of risk involved.

“We are surprised by the number of asset managers who still don’t really understand this,” adds Meakin.

“Also they need flexibility and commitment regarding collateral and commitment, in that the clearing broker will not limit the types of collateral they will accept or the terms and haircuts on which they will accept it, at least not without sufficient notice. Some asset managers and funds may need the ability to post a wider range of assets or a service whereby the clearing broker can convert whatever assets they have into more liquid collateral.”

A handful of sell-side institutions – namely BNY Mellon, RBS and Nomura – have pulled away from offering client clearing, forcing their clients to begin their search again.

A trend of ‘unboarding’ has also sprung up whereby clients are being cut-off by their clearing providers. This has made it a concerning time for medium to small-sized asset managers either maintaining existing relationships or searching for new ones.

Commitment needed

“They [clients] need to know people will be there for them,” said Jamie Gavin, head of EMEA OTC clearing sales at Societe Generale. “We know some clients who were with RBS and then moved to BNY Mellon, it is terrible for them. They want to know if they are going to have to do this for a third time.

“People are now starting to get very nervous that some clients are getting unboarded and some are getting re-priced and they want to know that their clearing broker is going to be there for them.

“That is the whole point of clearing right? You are a safe harbour in a storm for them and if they have concerns that you are not going to be there for them then that is a worry.”

Gavin believes that with the amount of clearing brokers and FCMs pulling away from the space, the worst case for the buy-side is having to start onboarding with another new broker and going through the whole selection and due diligence process.

One large European asset manager – who preferred not to be named – said ‘unboarding clients is an issue for smaller asset managers’. The danger of unboarding and brokers pulling away from the space could affect all types of buy-side firms according to Gavin.

“It is not just smaller clients getting ‘unboraded’ out it is larger ones as well, which you wouldn’t expect,” he adds.

“We are seeing institutions who took a while to select their first clearing broker and go live, now looking to fill their second and third spots. Finally, we are seeing clients who have not chosen anybody yet.

“It is quite surprising because you would have thought it would be some of the less sophisticated clients, but we have seen quite a few large asset managers come forward recently and are only just kicking off their RFI rounds now. It is quite a mixture.”

The other concern surrounding the termination of the deal with a clearing broker is the notice period, according to Sebastian Reger, partner at law firm Sackers.

It will never happen to me

He agrees that the biggest risk is whether the brokers will continue with client clearing and says that for buy-side firms the termination period could be as short as a month.

“Clearing members reserve the right to essentially terminate the services on a relatively short notice,” says Reger.

“The other risk is that clearing members can reduce the credit line they give you. They reserve the freedom to cut credit lines and they may make you reduce existing transactions.

“From a buy-side risk point of view, that members can pull out of the business, or don’t like your credit profile or cut the transactions they can do for you is a big concern.”

Reger also highlighted that moving clearing broker isn’t always a straightforward process.

“If you move clearing brokers, we don’t tell our clients that they can definitely move 100% of their transactions across,” he adds.

Mandatory clearing is set to come into force towards the end of 2016, meaning the time for buy-side firms to act is now. Though some have begun clearing early, others are biding their time. The same goes for clearing broker selection. Many have one clearing broker in place, but that is often not enough, especially with the uncertainty surrounding the clearing space.

Decision time

At Norton Rose Fulbright, Meakin represents both buy-side firms and clearing brokers and says the agreements between the two should pick up now that there is certainty around the start date.

“Many haven’t started negotiating agreements yet but we hope they may start to do so more actively now that they can see the first clearing obligation coming into effect.”

Meakin adds that only the biggest asset managers have begun clearing at present and the others are still putting arrangements in place.

“Various reasons for this including a desire to get a feel for what different clearing brokers will accept, such as what terms will really become market standard, and the need to get so many different internal stakeholders engaged and to sign off.”

Stefan Schmidt, derivatives trader at Frankfurt-based asset manager Union Investment, explained that they looked for one local and one foreign broker among other requirements when making their decision.

“Our criteria was finding two experienced fixed-income-brokers with extraordinary skills in trading and clearing OTC derivatives, one local and one foreign,” he explained.

“Since our EMIR project began in 2013 we have started trading bilateral collateralised and of course we started trading interest rate swaps centrally cleared. Credit default swaps will follow in the next three months.”

Schmidt added that the decisions were not made in line with any pre-existing deals with their two clearing brokers, and that the firm wanted access to clearing houses LCH.Clearnet and Eurex Clearing.

“People are looking for regional experts,” says Steve Woodyatt, CEO of tech vendor ObjectTrading. “Where there is a regional specialism there is an advantage.”

Woodyatt added that the services the buy-side receive are changing. He believes that fees may not have fluctuated much in recent years, however the services the buy-side receive may be diminishing.

“Fees are not going down or up much, but value is being removed from the packages so people are getting less for their money,” he says. “Suddenly some of these sell-side firms don’t offer market data in the package, for example.”

The clock is ticking and as mandatory central clearing for the buy-side draws closer, firms will have to start securing their clearing broker relationships and that could mean a lot of research and tick boxes in order to find the perfect match.

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The adoption of a utility model for core post-trade and related processes, could save banks up to $4 billion annually, according to a report from Broadridge.

The report outlines that core post-trade processing is “the logical starting point for an industry utility… its high levels of standardisation and growing compliance requirements make it one of the most attractive areas for cost mutualisation.” 

The main attraction for a utility model is cost, whereby banks have become increasingly pressured to cut costs as a result of regulation.

The report highlights that the finance industry spends between $17 billion and $24 billion per year on core post-trade processing, reference data, reconciliations, trade expense management, client life-cycle management, corporate actions, tax and regulatory reporting.

A utility model is being increasingly explored in the derivatives market. In June SunGard went live with a new outsourcing clearing utility for futures and OTC derivatives, with Barclays as its first client.

Furthermore a number of banks and market infrastructures have cooperated in the creation of a swaps margin utility. 

Speaking at an industry conference in June, Michele Neal, then global head of Listed Derivatives, Markets Clearing & Market Structure for Deutsche Bank, said outsourcing is on the radar for banks, but whether to adopt a full outsourced utility model is at the crux of the debate for the industry. 

“What will an outsourced solution be if it means the same thing to everybody? Will everybody put the same number of things into that box, or will people try to think about what particular things touch my clients which can be differentiated, or will they outsource the most generic [functions] which involves the least amount of risk?” said Neal.

“The marginal cost of every client that moves into that model should mean the cost going down… This is definitely a watch this space kind of thing.”

However, the Broadridge report identifies a number of hurdles the industry still has to overcome before a viable utility model can be adopted for all banks.

These include aligning governance, ownership and pricing models, and identifying a viable technology and operating model that can support multiple banks with unique business lines such as custody, prime brokerage and asset management.

But according to Broadridge, the potential benefits of a utility model far outweigh the hurdles that have undermined efforts in the past.

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