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Clearing Amp Settlement
DTCC and Euroclear in collateral pool deal
From the Financial Times of Mon, 29 Sep 2014 21:27:59 GMT

Two of the world’s largest securities depositories have finalised a joint venture to create a vast pool containing trillions of dollars of collateral to ease banks’ search for scarce assets to back trading.

The US’s Depository Trust and Clearing Corporation and Belgium’s Euroclear confirmed they would create a venture called DTCC-Euroclear Global Collateral Ltd. The two have been in discussions for more than a year.

The venture is, to be based in London, is intended to ease a potential strain on over-the-counter (OTC) derivatives markets in the wake of new regulations. Post-crisis, authorities have stipulated that more derivatives trades be backed by collateral or “insurance” for trading, as protection against defaults.

As markets legislation gets tighter, the frequency of daily margin calls from counterparties is expected to rise sixfold, executives say, while other rules will limit the number of times that collateral can be recycled for other trades. Post-trade service providers such as clearing houses collect collateral, typically highly liquid assets like top-rated government bonds or cash.

The Bank for International Settlements (BIS) has estimated up to $4tn may be needed over several years. Such fears have been dismissed by others, who argue that there is already sufficient global supply.

Euroclear and DTCC will allow each other’s customers to access their collateral pools. Both hold around ($43tn) of assets under custody for customers. In time the two plan to manage collateral held at both firms’ depositories as a single pool.

However users will not be able to access US Treasuries immediately, a large part of both companies’ assets under custody. The sides confirmed the asset class would be outside the scope of the project at the outset as they use a different settlement system.

"In time nearly all the assets will be available," confirmed Tim Howell, chief executive of Euroclear. He added the system would be open for other depositories to join.

The two will merge a piece of their own technology to create an open IT system that will underpin the venture. It will initially offer automatic transfer and segregation of collateral based on agreed margin calls for OTC derivatives and other collateralised contracts.

Michael Bodson, chief executive of DTCC, said the companies were already building similar systems. “Rather replicating each other’s technology, we decided to share them.” He added that the companies were not discussing any other ties.

Ownership and governance of the joint venture will be divided between the companies. Michael Shipton, head of corporate technology at Euroclear, will become chief executive of the venture while Mark Jennis, managing director of strategy and business development at DTCC, will become executive chairman. Market participants are set to begin testing of the technology in middle of next year.

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