Eurex, Eurex Clearing
It started about two years ago and, since then, CCP cleared repo for the buy-side has been increasingly and intensively discussed in Europe. Why this sudden interest and how can one turn the growing interest into growing business? Frank Odendall, Senior Vice President, Head of Securities Financing Product & Business Development, Eurex, has some ideas.
Frank, what is the reason for the discussions and why did they not start much earlier?
I think it’s basically due to the fact that everyone now expects an increase in collateral requirements and necessary collateral mobility driven by the implementation of Uncleared Margin Rules. Then there is less and less balance sheet capacity provided by banks, especially around month and quarter ends. And the overall keyword is, of course, risk mitigation.
A recent Finadium article analyses the supply of centrally cleared repo from European, US and Canadian CCPs and argues that the offers are not being taken up in Europe. Do you share this opinion?
It is a well-founded article that I generally agree with. However, I would evaluate the arguments and their importance differently:
Not all buy-side companies suffer from balance sheet constraints as banks often do not charge full balance sheet costs of the repo business. Frequently, they are cross subsidizing it to win more profitable business, e.g. derivatives.
The implementation of CCP cleared repo is a project for many buy-side entities. However, mandatory regulatory items often had priority over the last two years due to the Securities Financing Transaction Regulation, Brexit, the Multiannual Financial Framework of the EU regulation and preparation for Uncleared Margin Rules. The pandemic also significantly reduced available resources.
Also, until recently, collateral management may not have been a front office function for many buy-side firms and not a focus for most. Quantitative easing and negative interest rates now lead to real costs for Eurozone buy-side cash providers though. To meet regulatory driven collateralization obligations at reasonable cost and acceptable risk, operationally efficient collateral mobilization and transformation is quickly turning out to be a must.
What should, in your opinion, be done to improve take up in Europe?
We need to develop smart solutions to integrate CCP cleared repo into buy-side infrastructures similar to centrally cleared derivatives and thereby reduce implementation costs and time.
In addition, we must better articulate the many advantages of CCP cleared repo which are less quantifiable, e.g. maintenance of single clearing agreement vs. dozens of bilateral Global Master Repurchase Agreements, access to additional counterparties without requirement of individual credit assessment, standard T+0 funding in CCP repos vs. T +1 or T +2 in bilateral markets to name just a few.
Deutsche Börse Group’s regulatory team has recently developed a position paper on these topics. Can you quickly summarize its content?
I think most of us would agree that European regulation could do more to facilitate CCP cleared repo. For example, the counterparty limits for UCITS that do not differentiate between CCP cleared and non-CCP cleared repo. The paper highlights the many regulatory aspects which we think could help accelerate the pick-up and improve the business case for a wider range of buy-side entities to implement centrally cleared repo. It is worth reading.