Euroclear’s Olivier Grimonpont is mindful of that fact that where a firm operates matters, especially in today’s market.
“A change is underway,” he suggests. “Businesses seem to be placing more importance on their operational jurisdiction.”
Although we avoid going down the route of geopolitics, it’s clear what Grimonpont is alluding to.
Brexit, US tax reform, trade barriers - to name but a few factors - mean banks and the buy-side are now more carefully considering where and how to do business.
Euroclear itself, for example, intends to shift the residence of its parent holding company from the UK to Brussels in anticipation of possible risks due to Britain’s upcoming departure from the European Union (EU).
Grimonpont has spent over 25 years working across financial markets and keeps a close eye on macroeconomics.
As a senior figure at the firm, one of the world’s largest providers of post-trade processing, he is used to change.
That said, the Belgian-born, London-based executive makes a confident prediction.
“Trading is going global,” he said. “We might see businesses relocating or ‘re-centering’, if you like, but the reality is that transactions are increasingly becoming cross-border.”
That’s reassuring if you’re in the business of global financial plumbing.
It’s also positive if you’ve recently taken charge of a platform built to streamline collateral processing worldwide.
Grimonpont, Euroclear’s global head of collateral management and securities lending, became chief executive officer of GlobalCollateral at the start of 2018.
It’s three years since the joint venture between Euroclear and US clearing giant the Depository Trust & Clearing Corporation (DTCC) was established.
Its key aim remains the same - to address the challenge of efficiently allocating and mobilising collateral across the globe.
Although he’s only been at the helm for a few months Grimonpont has been involved in the venture since 2015 after moving back to London from Hong Kong.
“It made sense for me to take a bigger role at GlobalCollateral having already spent time looking at the product management,” the executive, who succeeded Michael Shipton as CEO, explains.
Shipton, who is chairman of Euroclear Sweden and Euroclear Finland, led the venture from its inception in October 2014 to the end of 2017. He remains on the board.
“It’s taken a few years get GlobalCollateral set-up with the right infrastructure,” Grimonpont adds.
“Now it has been built, we need to make sure we start adding clients.”
Northern Trust and State Street have announced their intent to leverage the Margin Transit Utility (MTU), one of the joint venture's services allowing straight-through processing of margin calls.
Another tool is the Collateral Management Utility (CMU) which automates securities finance trades and makes collateral available where and when it is needed.
Within the CMU – the Inventory Management System (IMS) - enables banks to maximise how they use their non-liquid US$-denominated assets by making them available to finance or collateralise overseas obligations.
“GlobalCollateral, much in the same way as Euroclear, is agnostic across products and markets. I like to think of us as an App store, anyone can come and try what they like.
Grimonpont (pictured) took charge of GlobalCollateral at the beginning of 2018.
Euroclear also prides itself as being a one-stop-shop for post-trade services across multiple products and markets.
If a market isn’t ‘Euroclearable’, there’s a good chance the firm already has people on the ground looking to change that.
Grimonpont points to some recent statistics to prove his earlier point.
Geopolitics, it seems, has failed to slow down markets or Euroclear’s businesses.
At the end of 2017, the group had a staggering €28.6 trillion worth of assets under custody, up 3% on 2016.
Its ‘Collateral Highway’ – which pools assets from central banks, central counterparties and thousands of other market participants around the world - mobilised an average of €1.15 trillion of collateralised transactions daily, up 7% compared to the prior year.
As a piece of financial market infrastructure, the Highway was built with the aim of getting assets moving to wherever they need to be.
Along the road there are multiple entry and exit points for collateral.
European Market Infrastructure Regulation (EMIR), Basel III, uncleared margin rules and Securities Financing Transactions Regulation (SFTR) are just some of the regulations impacting collateral markets at present.
Uncleared margin rules for over-the-counter (OTC) derivatives and EMIR central clearing in particular have heightened the demand for high-quality collateral and for efficiency in mobilising it.
At the same time, Basel III liquidity and leverage ratios were cited as the leading cause of the breakdown in the repo markets that perform the vital role of liquidity and collateral transmission.
“Certain restrictions have made it more difficult for dealers to continue dealing in the repo space,” Grimonpont admits.
“Direct, peer-to-peer, and all-to-all markets are being considered as a new, additional alternative to support the changing landscape. We’re closely following the progress of Elixium.”
Lombard Risk Management and post-trade vendor Pirum are already collaborating with Elixium, a collateral platform owned by inter-dealer broker Tradition, on an integrated offering for repurchase agreements.
Both firms also have strong ties with Euroclear.
“For Euroclear, as a tri-party agent, it’s about having the right infrastructure and partnerships in place to allow firms to reach pools of assets easily whenever and wherever they need to, including non-financial firms.”
Certain partnerships will also likely extend to cover upcoming securities finance trade reporting rules.
SFTR is Europe’s way of enhancing the transparency of securities financing markets - stock loans, repos and margin lending.
The reporting aspect is set to enter into force in the first half of 2019. With over 150 data fields needing to be reported to a trade repository on the next working day (T+1), SFTR will be challenging to say the least.
“We’ll be delivering a solution,” Grimonpont explains.
The European Securities and Markets Authority (Esma), which is waiting for the European Commission to sign off its final SFTR technical standards, warned in March that a lack of preparation time and inconsistent implementation are the two biggest threats which could hamper the introduction of SFTR.
Grimonpont has a few concerns: “SFTR will undoubtedly increase the costs of trading repo and stock loan,” he said.
“There is a risk that some activity stops and smaller players step out of the market. That would be regrettable. We want the market to continue to move towards securitisation. I don’t think repo should be made more difficult than it already is.”
Grimonpont also said there is an “inevitable problem” of an unfair playing field SFTR creates between regions.
The US, for example, is not going in the same direction as Europe when it comes to reporting stock loan and repo trades.
Despite concerns around SFTR, Grimonpont is bullish on the prospects for Euroclear’s securities lending business.
The firm’s main job in this regard is to ensure that each and every loan settles with the correct counterparty and that exposure is mitigated with the collateral chosen by the client.
“Our Tri-party Securities Lending services is the fastest growing segment. What’s clear from the data is that the market is moving away from cash and looking for tri-party services providers to manage non-cash collateral.”
According to the International Securities Lending Association (ISLA) non-cash collateral held in tri-party services increased to €1.3 trillion at the close of 2017, from €1.2 trillion reported at the end of June 2017.
Meanwhile, Grimonpont said Euroclear is fully engaged with ISLA to develop pledge structures.
Pledge structures have a risk-weighted asset capital benefit from the borrower’s perspective and ISLA has noted that these seem to work effectively as a tri-party arrangement.
Another sec lending service, Euroclear’s Automatic Securities Lending programme, targets borrowing demand to avoid settlement fails, is also seeing growth.
A third tool, the General Collateral Access (GCAccess) service allows firms to lend or borrow baskets of high-quality securities in exchange for other collateral.
“You get the right collateral to meet your regulatory requirements and Euroclear shoulders the full administrative burden,” Grimonpont explains.
“It’s a €1.5 trillion pool. There’s demand for longer-term strategic borrows rather than just for short term lending.”
Over 60% of Euroclear’s lending pool is provided by European central banks via the public sector purchase programme.
Grimonpont adds that he is also looking to use GlobalCollateral to extend Euroclear’s reach into the US securities lending space, particularly around equities.
Looking ahead, with the relaxing of quantitative easing, Grimonpont suggests the demand for HQLA might have “plateaued” but will continue to be significant.
In the meantime, macroeconomics and Brexit will keep things interesting.
“We’re considering possible scenarios and developing new services to ensure collateral gets where it needs to be. That’s what we are here for.”
Olivier Grimonpont, Euroclear’s global head of collateral management and securities lending, became chief executive officer of GlobalCollateral at the start of 2018.