The ICMA European Repo Council has today signed a Memorandum of Understanding with Clearstream, Euroclear and Eurex Clearing, which engages the three post-trade infrastructure providers in a joint project enabling their systems to work together to increase the efficiency of the repo market.
The project primarily creates the opportunity for Eurex Clearing to extend the connected settlement locations for its secured funding market GC Pooling with Clearstream Banking to include Euroclear Bank. Pending completion of detailed feasibility studies and market consultation, triparty settlement interoperability is envisaged to be delivered by the end of 2015.
A triparty repo is a transaction for which collateral selection and substitution, valuation, settlement and custody during the life of the repo transaction is outsourced by the two trading parties to a third-party agent. Eurex Clearing is a central counterparty ("CCP"), which defines the eligible securities for repo baskets (e.g. GC Pooling) and clears triparty basket trades directed to it by repo trading venues.
Establishing triparty settlement interoperability with both triparty service providers will improve the movement of collateral between the connected settlement locations in Europe. It will also reduce collateral pool fragmentation, which currently can cause technical fails, while allowing banks to supply liquidity to the real economy through the intervention of the repo markets. The initiative will increase the efficiency of collateral management for repo basket trading throughout Europe and will boost the fluidity of collateral across the Euro zone.
Commenting on behalf of ICMA's European Repo Council, Godfried De Vidts said: "Today's MoU is a big step forward towards building a true single European capital market. No longer will the fragmentation of location of collateral in Europe harm the transmission of liquidity between market participants. When completed, this development will contribute to a safer settlement environment allowing banks to allocate cash to the real economy where most needed."
Stefan Lepp, Member of the Executive Board and Head of Global Securities Financing at Clearstream, said: "Today's agreement marks a major milestone for the further improvement of interoperroperability between financial market infrastructures. It is sending a strong signal that we are committed to delivering this long-awaited market requirement that will also strengthen our collateral value proposition as part of our Global Liquidity Hub. In order for the industry to fully benefit from triparty interoperability between Clearstream and Euroclear, we must also progress with enhancements to the settlement layer. Clearstream will work closely with Eurex Clearing and Euroclear on improving interoperability both between the two ICSDs and between the ICSDs and Clearstream Banking Frankfurt (the German CSD). The aim is to ensure the secure and seamless settlement of products across ICSDs and CSDs, commercial bank money and central bank money environments, prior to T2S implementation."
Yves Poullet, Chief Executive Officer of Euroclear Bank, said: "We look forward to discussing with Eurex Clearing and Clearstream how to deliver triparty settlement interoperability. In the challenging environment we face now and in the future, market participants are looking at us - their service providers - to collaborate more and offer innovative solutions to improve operational and settlement efficiencies. They want us to make the movement of vital collateral assets as fluid and as frictionless as possible across all market infrastructures globally. We fully support such a fundamental requirement and have been implementing this through our open collateral infrastructure called the Collateral Highway. This project, appropriately entitled Triparty Settlement Interoperability, is timely indeed."
Thomas Book, CEO of Eurex Clearing, said: "We are pleased to support this very important initiative in times where collateral management and liquidity management become critically important. The agreement between Clearstream Banking and Euroclear to create a triparty settlement interoperability framework and to enable seamless access to the two largest collateral pools in Europe will allow us to enhance and expand GC Pooling based on proven high product standards. This will strengthen the GC Pooling market and support our clearing members in reducing their collateral pool fragmentation, while keeping the high risk management standards of Eurex Clearing. This is an important task."