LSEG supporting Collateral Management services Alessandro Zignani Head of Business Development, LSEG Post Trade WFC 2015, Cancun, 20 May 2015 London Stock Exchange Group Page 1
Why Collateral Management is key New regulations require the use of more and more collateral: it is a valuable resource Basel III EMIR (2012) AIFMD (2013) UCITS V (2014) CSDR (2015) MIFID II (2015) 2014 vs 2004 +78% 100% 80% 60% Shift to secured activity in Euro markets Relevant share of Italian banks portfolio is still unexploited for secured transactions secured unsecured 40% -65% 20% 0% Source: ECB 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Data Warehouse Total portfolio (Fe15): 806 bn Govies 50% Uncovered Banks Bonds 35% ABS 12% Covered bonds 3% London Stock Exchange Group Page 2
EMIR and T2S are impacting the collateral chain in Europe Strong focus on Risk Management post Lehman failure with wave of new regulations that are impacting the usage of Collateral EMIR is forcing buy-side to hold collateral in a CSD CCP clearing of OTC Derivatives has become compulsory for buy-side clients, EMIR (art. 47.3) to hold collateral in a Securities Settlement System Expected more request of collateral to support OTC clearing T2S will consolidate the fragmented European crossborder settlement environment and will reduce settlement costs and risks Objective to reduce the costs in cross-border settlement. Reducing the risk in settlement procedures by favoring settlement in Central Bank Money (CeBM) and offering advanced standards of resiliency, availability, business continuity and security. Increase competition with European settlement market removing monopolistic national barriers. 20 Markets harmonization Assets can be moved timely and freely London Stock Exchange Group Page 3
LSEG - The offering of CSD services Monte Titoli - Italian Issuer CSD (based in Milan) - 3rd CSD in Europe with over 3,4 trillion assets - New strategy to become an investors CSD for T2S markets - Complete Pre-settlement, settlement, custody, asset servicing - Launch new value added services: triparty collateral management platform globesettle - Authorised in Lux in 2014 - Investor CSD as a start. - Operating 22 hours out of 24. - Introduction of the Collateral Day concept - Services offered to tri-party agents, CCPs, Lenders and Central Banks - First Client JPMorgan (onboarding in progress) The two CSDs can leverage on the IT platform, Network and Operations of Monte Titoli London Stock Exchange Group Page 4
Margin OTC derivatives Settlement Stock lending Margin OTC derivatives Settlement Stock lending Utilized Not Utilized Utilized Not utilized Portfolio optimization and liquidity centralization Highly fragmented Internal Effective use Internal Assets Assets Assets T2S Under pressure Centralisation of securities and liquidity Collateral Management X-COM Exploit the whole portfolio External London Stock Exchange Group External Page 5
The role of a Triparty Agent Collateral Giver Collateral Receiver Selection of collateral Verification of eligibility Valuation Valuation Transfer of collateral Mark-to-market Management of Corporate Actions Collateral substitution according to the agreement Restitution of funds TRIPARTY AGENT Transfer of liquidity Mark-to-market Management of Corporate Actions Risk management (concentration limits, close links, rating check) Restitution of assets London Stock Exchange Group Page 6
X-Com Triparty Collateral Platform Strategy Strength relationship with existing and new clients Increase revenues Next enhancement will include: Securities Lending Margin management for CCPs Collateral Transformation OTC Clearing Simplification in back office Minimize risk Full control on securities portfolio Full outsourcing of the management of financing operations and collateral Sophisticated\Customized tools to control risks (hair cuts, eligibility criteria, margin calls, concentration limits, close links) Recall and automatic substitution of securities in collateral Optimised use of collateral Customized selection of collateral based on rating and size London Stock Exchange Group Page 7
Introducing Triparty contract in the domestic market X-com launched in Sept 2012. Major enhancement in May 2015 when the service was extended to the management of OTC and On-Exchange repo trades CC&G (Italian Central Counterparty) has launched ECB denominated repo basket), a central clearing service for the triparty repo market. The Repo Basket contract is traded in MTS and E-Mid and Monte Titoli is the tri-party agent. Monte Titoli automatically selects collateral composed by Government, Corporate bonds and ABS which are ECB eligible and ratings not lower than investment grade
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