Euroclear UK & Ireland enhances DBV service
05 July 2011 London
Image: Shutterstock
Euroclear UK & Ireland (EUI) is increasing collateral management efficiency and reducing operational risks and costs in the UK for securities finance transactions, primarily involving repos. For the first time, effective immediately, UK market participants can use EUI to manage all of their collateral needs and movements against term repos for the duration of these transactions.
This new development to EUI鈥檚 Delivery-by-Value (DBV) service heralds a new beginning in the way that UK firms will be able to manage exposures arising from their financing strategies. It eliminates a mismatch between collateral movements and the underlying financing transaction agreed between two counterparties.
Current market practice entails the need for clients to shift their entire collateral positions in and out of their EUI collateral accounts every evening and the following morning, respectively, even when underlying collateralised transactions are of a longer duration. Consequently, the movement of sizeable collateral positions in both cash and securities is required twice per day, every day, throughout the life of the transaction. Clients are charged for each daily collateral movement. The new service will no longer oblige UK market participants to continue this market practice. The counterparties are charged upon the creation and maturity of the term DBV and a small daily management fee no matter the number of collateral movements each day.
Yannic Weber, chief executive officer of Euroclear UK & Ireland, said: 鈥淎fter two years of rigorous market consultation, we are launching a collateral management service that provides clients with unprecedented flexibility to manage their exposures and operational risks. In close co-operation with the Bank of England, more than twenty participating clients and several trade bodies, Euroclear UK & Ireland is the first central securities depository within the Euroclear group to offer such a service."
Weber continued: 鈥淭his new collateral management service available to EUI clients is the first stage of Euroclear鈥檚 overarching plan of providing clients of both national and international central securities depositories with automated collateral management services."
Peter Lightfoot, RBS Global Banking & Markets, expressed: 鈥淲e welcome this initiative as it will greatly reduce the operational risks of rolling such huge flows every day, particularly when the underlying transaction is normally of a much longer maturity.鈥�
Matt Tuck, head of financial institutions at Barclays, said: 鈥淭he introduction of an enhanced collateral management service is a welcomed step forward in reducing operational risks around large liquidity flows, not only for clients, but for the industry as a whole. We will support our clients who wish to utilise this new service in addition to the existing product set.鈥�
Nina Moylett, director wholesale markets at Prudential Capital, who manages GBP 10 billion on behalf of Prudential and its funds, said: 鈥淎s a cash manager actively using DBV in our liquidity and collateral management we welcome the implementation of the term DBV product by Euroclear UK & Ireland to minimise intra-day exposures for term funding transactions.鈥�
How the term DBV service works
The Delivery-by-Value (DBV) service enables EUI clients to give and receive packages of securities as collateral against the creation of a cash payment in GBP, EUR or USD for financing purposes. For overnight DBVs, collateral is transferred by EUI at the end of the day and returned the next morning. Now, clients have the choice of entering into term DBV agreements with a pre-determined maturity date, or with an open-ended maturity.
On behalf of both counterparties, EUI manages all collateral management aspects of the term DVB, i.e. collateral valuations and substitutions, as well as processing the return of the securities and cash upon maturity.
Both counterparties retain full control over their collateral, whether securities or cash, throughout the entire life cycle of the term DBV transaction. EUI鈥檚 automated collateral management services ensure that securities used as collateral are correctly valued via a daily mark-to-market service. If there are fluctuations in the value of the collateral, EUI automatically executes a top-up or recall of securities to ensure that the exposure is precisely valued and covered with the right amount of eligible collateral. Automated intra-day collateral substitutions recall and replace individual lines of securities required for other transactions. Furthermore, any corporate events that impact securities used as collateral are handled by EUI, e.g. splits, interest payments, etc.
This new development to EUI鈥檚 Delivery-by-Value (DBV) service heralds a new beginning in the way that UK firms will be able to manage exposures arising from their financing strategies. It eliminates a mismatch between collateral movements and the underlying financing transaction agreed between two counterparties.
Current market practice entails the need for clients to shift their entire collateral positions in and out of their EUI collateral accounts every evening and the following morning, respectively, even when underlying collateralised transactions are of a longer duration. Consequently, the movement of sizeable collateral positions in both cash and securities is required twice per day, every day, throughout the life of the transaction. Clients are charged for each daily collateral movement. The new service will no longer oblige UK market participants to continue this market practice. The counterparties are charged upon the creation and maturity of the term DBV and a small daily management fee no matter the number of collateral movements each day.
Yannic Weber, chief executive officer of Euroclear UK & Ireland, said: 鈥淎fter two years of rigorous market consultation, we are launching a collateral management service that provides clients with unprecedented flexibility to manage their exposures and operational risks. In close co-operation with the Bank of England, more than twenty participating clients and several trade bodies, Euroclear UK & Ireland is the first central securities depository within the Euroclear group to offer such a service."
Weber continued: 鈥淭his new collateral management service available to EUI clients is the first stage of Euroclear鈥檚 overarching plan of providing clients of both national and international central securities depositories with automated collateral management services."
Peter Lightfoot, RBS Global Banking & Markets, expressed: 鈥淲e welcome this initiative as it will greatly reduce the operational risks of rolling such huge flows every day, particularly when the underlying transaction is normally of a much longer maturity.鈥�
Matt Tuck, head of financial institutions at Barclays, said: 鈥淭he introduction of an enhanced collateral management service is a welcomed step forward in reducing operational risks around large liquidity flows, not only for clients, but for the industry as a whole. We will support our clients who wish to utilise this new service in addition to the existing product set.鈥�
Nina Moylett, director wholesale markets at Prudential Capital, who manages GBP 10 billion on behalf of Prudential and its funds, said: 鈥淎s a cash manager actively using DBV in our liquidity and collateral management we welcome the implementation of the term DBV product by Euroclear UK & Ireland to minimise intra-day exposures for term funding transactions.鈥�
How the term DBV service works
The Delivery-by-Value (DBV) service enables EUI clients to give and receive packages of securities as collateral against the creation of a cash payment in GBP, EUR or USD for financing purposes. For overnight DBVs, collateral is transferred by EUI at the end of the day and returned the next morning. Now, clients have the choice of entering into term DBV agreements with a pre-determined maturity date, or with an open-ended maturity.
On behalf of both counterparties, EUI manages all collateral management aspects of the term DVB, i.e. collateral valuations and substitutions, as well as processing the return of the securities and cash upon maturity.
Both counterparties retain full control over their collateral, whether securities or cash, throughout the entire life cycle of the term DBV transaction. EUI鈥檚 automated collateral management services ensure that securities used as collateral are correctly valued via a daily mark-to-market service. If there are fluctuations in the value of the collateral, EUI automatically executes a top-up or recall of securities to ensure that the exposure is precisely valued and covered with the right amount of eligible collateral. Automated intra-day collateral substitutions recall and replace individual lines of securities required for other transactions. Furthermore, any corporate events that impact securities used as collateral are handled by EUI, e.g. splits, interest payments, etc.
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