STRIKING ALLIANCES.

Frédéric Hannequart explains how Euroclear Group is helping clients respond to the new regulatory regime.

There is so much regulation, but what are the most important rules impacting Euroclear?

Target2-Securities will have an impact in so far that central securities depositories will have to refocus their activities. The Central Securities Depository Regulation (CSDR) may have the effect of creating a parallel universe whereby some CSDs will have to ring fence their banking operations while others can operate under a derogation regime and keep them under one roof. I do believe the biggest impact on our business will come from Basel III and the European Market Infrastructure Regulation, both of which aim to mitigate risks and increase the need for collateral efficiency. We are restructuring our services to meet the new regulations. Many of the services are already core to our business, so the main objective for us is to deliver very quickly a range of relevant, value-added products that will benefit our clients.

What are the non-regulatory drivers?

There are two main drivers.

The days of the market growing 8% to 10% per year are gone. Growth has not come back since the financial crisis and it has been a tough few years. A lot of our clients are focused on cost reductions because business volumes have not increased. Cutting our fees is only one answer. We have also enhanced our services to provide more for less, particularly in collateral management, asset servicing and straight-through processing. It is also very important to be agile in this marketplace in order to respond quickly to new client needs.

The greater focus on cost has meant a trend towards mutualisation. This second business driver has led us to form partnerships and joint ventures with companies that are the best at what they do. For example, we recently partnered with SmartStream to create a centralised reference data utility service that sources securities data from data vendors and data originators, including CSDs and stock exchanges. We believe that together we can deliver meaningful back-office savings as well as the highest possible level of securities information accuracy. We also have an agreement with Broadridge to provide an automated end-to-end proxy voting service, as well as Markit which will distribute our Eurobond reference data.

Any other drivers?

The other main driver is the move towards collateralisation, which I think would have happened outside the regulatory requirements anyway because of the need for transaction security. The potential problem is the shortage of eligible collateral and we see our role as helping clients source and mobilise the right collateral more efficiently. In the past, this would be done through our tri-party services with assets that were held in Euroclear Bank, but we have recently opened our collateral management system to firms that do not have assets with us.

Can you explain in more detail?

In the summer we launched what we call the ‘Collateral Highway’, which helps market participants move securities from wherever they are held to serve as collateral for access to central bank liquidity, secured transactions such as repos and securities loans, and margins for CCPs (central counterparties) and bi-laterally cleared OTC derivative trades. It has multiple collateral entry and exit points and is open to a wide range of collateral givers and takers, including all CCPs, CSDs, central banks, global and local custodians, investment and commercial banks. BNP Paribas, the Banque de France and the CSD of the Hong Kong Monetary Authority were the first to sign on. We most recently reached an agreement with the Korea Securities Depository.

The aim is to facilitate the provision of collateral for multiple types of transactions and we believe that our open architecture model will help solve a lot of the problems. It was important for us not just to announce that we were working on this project, but to actually deliver the business and bring all our collateral management products together on the Collateral Highway.

What have you been doing at the CSD level on the collateral side?

We have been active in the collateral management space for over 20 years and we are sharing our expertise with the clients of our CSDs by expanding our triparty services across the group. Last year, Euroclear France (the French central securities depository) launched its first triparty collateral management service for the French market with Banque de France. The new service collateralises exposures arising from domestic credit operations conducted by the French central bank. We also launched a term delivery-by-value collateral management service in Euroclear UK & Ireland.

Can you explain why you launched EasyWay?

EasyWay is a new web-based tool that gives clients an integrated, holistic view of all their activities within Euroclear regardless of where the assets are held in the group. It can be accessed not only on a desktop, but also on an iPad and other tablet devices, which has become increasingly important in today’s world. People want to monitor and track information when they are out of the office and EasyWay allows them to do so. We launched in November and started with corporate actions, but the plan is to gradually extend EasyWay to include settlement, collateral management and other custody services. It will ultimately be used by clients of the entire Euroclear group of CSDs. We designed and built it in collaboration with clients with the main objective to give them a product that will help them efficiently and effectively perform operational tasks while better managing operational risk in real time.

Can you tell me more about your global plans?

We have increased our focus on emerging markets in Asia, Latin America and Eastern Europe because these markets are becoming more important and the markets are growing. We recently announced that UBS and HSBC conducted their first ever renminbi (RMB) triparty repo using Euroclear Bank and the Hong Kong Monetary Authority (HKMA) as collateral management agents, respectively. Also, Russia’s Federal Financial Markets Service decided to open its markets to Euroclear Bank, which we see as a positive step. We will soon be offering post-trade services for Russian OFZs, which are one of the most actively traded classes of the country’s government bonds.