Strate, Africa’s leading Central Securities Depository (CSD), and Clearstream, the International CSD (ICSD) and national CSD that is part of the Deutsche Börse Group, have announced the launch of a centralised collateral management service for the South African financial market. Some of South Africa’s largest financial institutions*, including banks, a number of fund managers and the JSE, have committed to exploring the use of these services to more efficiently manage collateral and to mitigate operational and credit risk within the South African market.
The introduction of new international regulations, such as Basel III and Solvency II, which aim to protect the financial markets from systemic risk, will place pressure on the availability and funding costs associated with holding high-quality liquid assets (HQLA). In addition, the G-20 Finance Ministers have also recommended that all standardised ‘over-the-counter’ (OTC) derivatives should be cleared with central counterparties (CCPs). This move will require initial margin – which has traditionally been in the form of cash, but may be expanded to include HQLA – to be placed with the CCPs. Non-cleared OTC derivatives will also have to be collateralised.
Such regulations are set to affect the South African market as financial institutions will need to hold greater regulatory and solvency capital with increased requirements for unencumbered HQLA. The cumulative effect of each of these changes, the need for greater transparency as well as the specific South African regulatory and legislative obligations stated in the Financial Markets Act and Regulation 28 of the Pension Funds Act, point to a re-think of collateralisation in the industry.
As a result, South Africa’s financial institutions, together with Strate, have formed a Collateral Management Industry Forum with a view to explore the optimisation of collateral in the local market via Strate’s Collateral Management Service. The service was initially developed by Clearstream who have offered this collateral management service on an outsourced basis to market infrastructures, like CSDs, outside Europe’s borders since 2011. Along with South Africa, Brazil and Australia have been other non-European frontrunners in this initiative.
Despite cash being a common form of collateral, many financial institutions in South Africa are investigating the use of securities (equities, bonds and money market instruments) in order to meet their regulatory obligations. The use of securities as collateral does, however, introduce certain complexities and the market is looking at Strate’s service to more efficiently and automatically manage their collateral.
Strate’s Strategic Projects Director, Anthony van Eden, explains that there has been an overwhelming interest from the local market for the use of the service. “We are also in discussion with a number of other financial institutions, in addition to the ones named above, who are seeing the benefit of this industry-wide initiative and exploring the use of the service.”
Market-wide collateral optimisation is, to a large degree, a panacea for collateral fragmentation, scarcity and shortages, which the service looks to overcome. Stefan Lepp, Head of Global Securities Financing and Member of the Executive Board of Clearstream, says, “We are delighted that we have partnered with Strate in South Africa to assist financial institutions in managing their domestic collateral more efficiently.”
Lepp explains that it is a strategic priority of Deutsche Börse Group to make global markets more robust through risk and liquidity management solutions such as Clearstream’s collateral management outsourcing service. “Collateral has become a very scarce resource and sourcing good quality collateral is increasingly expensive. The service looks to manage collateral holdings and exposures much more efficiently to provide markets with access to much needed liquidity.”
As part of its risk and liquidity management offering, Clearstream has developed a collateral management outsourcing solution allowing its market infrastructure partners like Strate to manage the collateral of their underlying client base. The assets never leave the domestic environment and remain under local jurisdiction; hence contractual agreements between the partner (Strate) and its domestic client base remain unchanged. The initiative has gained momentum, as upcoming regulatory changes require financial and non-financial institutions to improve their capital management.
Clearstream is the only collateral management services provider with a proven ability to manage collateral across time zones without transferring assets out of the respective domestic environment. The collateral management outsourcing service went live with Brazilian CSD Cetip in July 2011, with the ASX Group, Australia, in August 2013, with Spanish CSD Iberclear and Strate in November 2013. SGX, Singapore, has signed a Letter of Intent with Clearstream and Clearstream and Canadian CDS have announced that they are working together towards a collateral management solution for the Canadian market.
*The financial institutions who have committed to exploring the collateral management solution and joined the Collateral Management Industry Forum include Absa Bank Limited (through their Absa Capital division), FirstRand Bank Limited (through their Rand Merchant Bank division), The Standard Bank of South Africa Limited, JSE Limited, Coronation Fund Managers, Maitland Group South Africa Limited and Prescient Investment Management (Pty) Limited.