SFTS: 2023 could see the return of pre-2008 crisis markets
25 November 2022 UK
Image: ipopba/stock.adobe.com
Collateral scarcity may no longer be a talking point for the industry in 2023 and market participants could begin to see a return to pre-financial crisis markets, said Gareth Jones, CEO of Euroclear GlobalCollateral.
The remarks were made at the 5th Securities 麻豆影视传媒 Technology Symposium, where Jones indicated that the industry may 鈥渂e at the point of inflection鈥�.
The Symposium鈥檚 Collateral Management panel, hosted by SFT鈥檚 Bob Currie, examined how firms manage their cash, collateral and margins, and how this is key to maintaining a competitive advantage.
Panellists included Martin Walker, head of product management, Securities 麻豆影视传媒 and Collateral Management at Broadridge, and Jerome Petit, EMEA market specialist manager at Adenza.
Solutions architect at HQLAX Martin O鈥機onnell and EMEA head of collateral services at J.P. Morgan Graham Gooden, completed the panel line-up.
Euroclear鈥檚 Jones noted that a reduction in settlement efficiency 鈥渂y a couple of percentage points鈥� was a key change toward the end of 2021, which had declined further during the Russian invasion of Ukraine. Although settlement efficiency has improved, it has not returned to where it was in the first half of 2021, he added.
鈥淭he reduction in settlement efficiency is typically associated with volatility and higher trading volumes, but it has been sustained for a while, which is an indication that there is some scarcity of collateral and securities liquidity out there,鈥� Jones explained.
Despite the fact that settlement efficiency is still down, Euroclear鈥檚 specialist borrowing programmes 鈥� GCA for HQLA and Autoborrow 鈥� linked to the firm鈥檚 settlement algorithm, are facing high record volumes. This activity fits with the general trend being seen by market participants, the panel heard.
Jones said: 鈥淲e all know central banks are holding very large volumes of assets as a result of asset purchases and we know that, with interest rates rising, it is almost inevitable that many people are positioned shorts. If you look to the US, they are ahead of us by six to 12 months in the interest rate cycle.
鈥淎bout six months ago, the US market was starting to predict the balance between collateral scarcity and cash scarcity would start to reverse in Q3 and Q4 this year, as interest rates rose and the Federal Reserve began to unwind its asset purchases. The trends in the US are beginning to show that this change is now starting to take place.鈥�
Adenza鈥檚 Petit noted that with the new market conditions, and with the application of UMR behind the industry, firms are now looking for more automation, more efficient optimisation of the inventory, as well as new solutions to manage this. He added that for Adenza as a vendor, 鈥渋t creates opportunities.鈥�
Continuing the discussion, Broadridge鈥檚 Walker indicated that the market conditions reinforced the need to 鈥済et the basics right鈥� in terms of good quality data, timely processes and automation.
鈥淸The industry has] seen with the LDI funds that firms are collateralising interest rate derivatives with bonds, with gilts, and firms are going to get risk on that. People need to get the basics right, supported by the vendors to deal with the market conditions, which are going to get a lot more exciting over the next couple of years,鈥� Walker said.
As market participants recognised the importance of automation, HQLAX鈥檚 O鈥機onnell noted that from the LDI experience, a number of firms had realised how constrained they were by manual processes.
O鈥機onnell pinpointed that there was a 鈥渉uge opportunity鈥� here for vendors. He explained: 鈥淭hese opportunities do not come along very often, but when we see the pain points, which were highlighted by that liquidity crisis especially, it is apparent that scalability and automation need to be invested in to ensure that those firms have the capacity to cope with stress volumes.
鈥淎fter a few years where firms have been concentrating on regulatory investment, the opportunity to re-focus on scalability and automation is now.鈥�
The remarks were made at the 5th Securities 麻豆影视传媒 Technology Symposium, where Jones indicated that the industry may 鈥渂e at the point of inflection鈥�.
The Symposium鈥檚 Collateral Management panel, hosted by SFT鈥檚 Bob Currie, examined how firms manage their cash, collateral and margins, and how this is key to maintaining a competitive advantage.
Panellists included Martin Walker, head of product management, Securities 麻豆影视传媒 and Collateral Management at Broadridge, and Jerome Petit, EMEA market specialist manager at Adenza.
Solutions architect at HQLAX Martin O鈥機onnell and EMEA head of collateral services at J.P. Morgan Graham Gooden, completed the panel line-up.
Euroclear鈥檚 Jones noted that a reduction in settlement efficiency 鈥渂y a couple of percentage points鈥� was a key change toward the end of 2021, which had declined further during the Russian invasion of Ukraine. Although settlement efficiency has improved, it has not returned to where it was in the first half of 2021, he added.
鈥淭he reduction in settlement efficiency is typically associated with volatility and higher trading volumes, but it has been sustained for a while, which is an indication that there is some scarcity of collateral and securities liquidity out there,鈥� Jones explained.
Despite the fact that settlement efficiency is still down, Euroclear鈥檚 specialist borrowing programmes 鈥� GCA for HQLA and Autoborrow 鈥� linked to the firm鈥檚 settlement algorithm, are facing high record volumes. This activity fits with the general trend being seen by market participants, the panel heard.
Jones said: 鈥淲e all know central banks are holding very large volumes of assets as a result of asset purchases and we know that, with interest rates rising, it is almost inevitable that many people are positioned shorts. If you look to the US, they are ahead of us by six to 12 months in the interest rate cycle.
鈥淎bout six months ago, the US market was starting to predict the balance between collateral scarcity and cash scarcity would start to reverse in Q3 and Q4 this year, as interest rates rose and the Federal Reserve began to unwind its asset purchases. The trends in the US are beginning to show that this change is now starting to take place.鈥�
Adenza鈥檚 Petit noted that with the new market conditions, and with the application of UMR behind the industry, firms are now looking for more automation, more efficient optimisation of the inventory, as well as new solutions to manage this. He added that for Adenza as a vendor, 鈥渋t creates opportunities.鈥�
Continuing the discussion, Broadridge鈥檚 Walker indicated that the market conditions reinforced the need to 鈥済et the basics right鈥� in terms of good quality data, timely processes and automation.
鈥淸The industry has] seen with the LDI funds that firms are collateralising interest rate derivatives with bonds, with gilts, and firms are going to get risk on that. People need to get the basics right, supported by the vendors to deal with the market conditions, which are going to get a lot more exciting over the next couple of years,鈥� Walker said.
As market participants recognised the importance of automation, HQLAX鈥檚 O鈥機onnell noted that from the LDI experience, a number of firms had realised how constrained they were by manual processes.
O鈥機onnell pinpointed that there was a 鈥渉uge opportunity鈥� here for vendors. He explained: 鈥淭hese opportunities do not come along very often, but when we see the pain points, which were highlighted by that liquidity crisis especially, it is apparent that scalability and automation need to be invested in to ensure that those firms have the capacity to cope with stress volumes.
鈥淎fter a few years where firms have been concentrating on regulatory investment, the opportunity to re-focus on scalability and automation is now.鈥�
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