Matthias Graulich
Thomas Book and Matthias Graulich on why Eurex Clearing’s Lending CCP has been embraced by borrowers, agent lenders and beneficial owners alike
The financial services industry has been in a process of constant change since 2008. This has created both opportunities and risks for market participants. What is your take on the current situation?
Thomas Book: The G20 commitment in 2009, to strengthen the international financial regulatory system, changed our industry. Since then, this change has been forcing all financial market players to make substantial adjustments to their business models and everyone is feeling the impact of these adjustments. With the US Dodd-Frank Act and the European Market Infrastructure Regulation, regulators have initially been focusing on lowering risk in the most obvious market segments, such as credit default and interest rate swaps. However, Basel III goes one step further and encourages the central clearing of bilateral transactions.
Driven by these frameworks, an entire industry started to adapt their business models, practices and offerings. Deutsche Börse, and in particular Eurex Clearing, have reacted by designing new solutions to help the buy and sell sides improve capital and operational efficiencies. This strategic approach comprises all areas: clearing technology, risk management and functionalities, as well as new service offerings.
Matthias Graulich: Europe is still lagging behind with implementing regulatory requirements for our industry. The implementation of the clearing obligation for over-the-counter (OTC) derivatives is still to be finalised. At the same time, the introduction of the new capital rules has moved centre stage and they are a great challenge for the industry. This environment has led us to reassess our business offerings and further leverage our strong trading, clearing and risk management capabilities.
In addition to the convergence of listed and OTC derivatives markets, we have more recently seen this convergence between derivatives and securities financing, with the critical role of securities financing to provide cost-efficient funding for derivatives’ margin requirements.
Clearinghouses have become much more significant, particularly in terms of how they are perceived by politicians and regulators. How much has this affected Eurex Clearing’s overall focus?
Book: The new landscape has had a strong impact on us. Clearing Eurex Exchange derivatives remains a core strength and important part of our value proposition. Simultaneously, we started to look at the whole market. Eurex Clearing Prisma—our portfolio-based risk management methodology—is one outcome of this holistic approach.
It provides a consistent risk management framework across all asset classes and enables us to offer cross-margining of listed and OTC products along the full rates euro curve. Our customers directly benefit from higher margin efficiency and lower funding costs.
C7, our new clearing infrastructure, is a second element of our strategic roadmap. And last but not least, we launched our Lending Central Counterparty (CCP) in 2013 to provide capital and operational efficiencies specifically for securities lending market segment.
Eurex Clearing was the first CCP in Europe to offer the safety and efficiency of central clearing to the bilateral securities lending market. Could you summarise your Lending CCP offering?
Graulich: We provide market participants with choices, as both bilaterally negotiated transactions (OTC) and transactions concluded on electronic trading platforms are supported. As a CCP and single counterparty to all trades, we reduce counterparty risk exposure and eliminate the need for multiple credit evaluations. Banks, for example, can optimise their regulatory capital usage while retaining their bilateral trading relationships. In addition, our services reduce post-trade complexity, which subsequently results in reduced costs and improved efficiencies for all members.
I believe that the unique combination of the technology-driven efficiency benefits, without disrupting the existing bilateral business relationship of the borrower, the agent lender and the beneficial owner has been the key reason for the wide acceptance of the CCP model in securities lending.
Book: Also, the Lending CCP should not be looked at independently from the other financial market segments where we are the CCP, such as our GC Pooling and Eurex Repo offerings. All are based on the same infrastructure and legal framework.
In 2014, the Lending CCP introduced a specific lender licence to allow the direct access to the CCP for beneficial owners. How has this offering evolved, and what additional benefits can the buy side expect?
Graulich: The specific lender licence preserves the relationship-driven business structure and at the same time delivers the capital efficiency and safety associated with central clearing. This structure allows banks as counterparts of lenders to significantly reduce capital requirements by reducing risk weighted assets and improving the leverage ratio. As a result of these costs reductions, beneficial owners and their agent lenders benefit from better lending terms then if the transaction stayed traditionally bilateral. Additionally, our aim has been to provide the buy side with more flexibility through tiered membership, which increases the liquidity available to clients.
Moving forward, our goal is to expand the Lending CCP by bringing further innovation to the marketplace. One of our latest initiatives, for example, has been to develop a cash collateral solution for specific lenders in conjunction with agent lenders to allow their beneficial owners to accept cash collateral using the specific lender licence, and enable multiple loan allocations to accommodate agent lenders’ pooled loan models.
What can your customers expect in terms of the geographical reach of these services and initiatives?
Graulich: We are extending our reach as we will add new equity markets in Europe and North America. The specific lender licence will also allow extensions to non-EU participants in Asia, the Middle East and North America. To leverage our new markets and offer our global customers further services and opportunities, we are also entering into strategic partnerships with leading borrowers and agent lenders.
In addition, we aim to further facilitate simplified access to our services, and therefore develop additional partnerships to facilitate the capture of trade flows and assist market participants in their ability to select from a range of collateral locations.
What was the overall feedback from market participants—has innovation paid out?
Book: Innovation always takes time. Over the last three years, we closely worked with our customers to further develop the service. Nowadays, we receive very positive feedback from market participants. Eight clearing members have already joined our Lending CCP and started to actively clear posting substantial volumes in April and May this year. Even more importantly, we have a full onboarding pipeline—further market participants have made the decision to use this service offering and are in the process to become a member. With these initiatives, the geographical expansion and the addition of further participants, we are poised to continue our success story—a story of innovation.
