GFF Podcast
The Global Funding and Financing (GFF) podcast is Clearstream’s podcast series for the funding and financing industry, releasing monthly episodes with senior leaders in the space of secured finance covering all major topics shaping the world of collateral, securities lending, repo and OTC derivates leading up to the 2022 edition of the GFF Summit in Luxembourg. Stay connected with the GFF community across the globe and subscribe to our show. Each of the 30 minutes of lively episodes are hosted by Andrew Keith Walker, Finance and Tech Journalist and Christian Rossler, Senior VP, Securities Lending and Borrowing Products at Clearstream. Legal Information here - https://www.clearstream.com/clearstream-en/imprint-1277756
GFF Podcast
Collateral management special: Margins, optimisations & innovations
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This month's show takes a deep dive into collateral management with Gaël Delaunay, Head of Collateral Management at Clearstream. Joined by Priya Sharma, Head of Data & Client Connectivity, we explore the technology and the data strategy underpinning the latest innovations in collateral management. We also take a closer look at major milestones in our D7 digital issuance platform, tokenisation, blockchain settlement advances, regulatory reporting and data quality - plus the latest advancements in AI-powered marriage broking (via OSCAR), automated margining, collateral mapping and the new enhanced Xact portal.
Hello and welcome back to the GFF podcast. And finally the sun is shining here in the virtual studio. It's shining here in the UK after a very wet summer so far, and hopefully you are enjoying some sun wherever you are listening to this show and, of course, enjoying the Olympics in Paris, which are getting off to a great start as we are recording. And if you're getting a break this August, I hope you're enjoying it. I hope the sun is good. And if you're getting a break this August, I hope you're enjoying it. I hope the sun is good. And if you're in the office working, I hope the aircon is kind to you.
Speaker 1And this month we are going in depth and under the hood with all things collateral management, collateral optimization, haircuts, margining, you name it. We've got it, plus the tech to back it up. And joining me, of course, is my co-host, the BFF of GFF, Mr Christian Rossler. Christian, welcome back to the virtual studio. It's great to be back in the studio. It's good, isn't it? It's nice Now we can finally, you know, see each other in a well-lit studio space with fantastic audio.
Speaker 3You and me look younger.
Speaker 1You know, it's amazing what ai can do, isn't it, uh, considering we're both in our 90s and yet look at us this is amazing. Let's, let's stop it there, but it's good to be back, yeah it's good to have you back and we have a different approach, don't we? For season four, we're looking at big themes across the whole of what's coming up over the rest of the year, so why don't you tell the audience what's going to be shaping this year's GFF podcast series?
Speaker 3Yeah, as we already touched upon it in the season four premiere, the last episode we did with our colleagues that attended Isla. The outcome of Isla was also that a lot of the drivers that are going to shape the products and services of the industry going forward are underpinned by regulation and regulatory change coming in Basel Endgame, basel 3, or Baal 3, if you're that way inclined.
Speaker 1We've got Mifid 2. There's a rewriter updates coming there. We've had CSDR. I believe changes come through already. There was a CFTC rewrite, obviously earlier this year. We've got SFTR, BRRD. There's reforms perhaps coming in Dodd-Frank. There's reforms perhaps coming in Dodd-Frank. I didn't know about that. This is just what AI told me this morning and obviously the Financial Stability Board principles as well. Some changes there, plus, of course, changes regionally and different markets in Asia. There's J-MAS coming in Japan. There's changes in Singapore, changes in Australia. There's a lot of regulatory change that is going to be affecting the world of repo securities lending derivatives.
Speaker 3Tell us more about it earlier there's a lot of regulatory change that is going to be affecting the world of repo securities lending derivatives. Tell us more about it. No, I'm lost when I listen to all those acronyms, but I think what it means actually is that and I think we have to take it back to the very origins why these regulations have been implemented. These are actually designed to bring additional stability to the global banking business, and so focuses on capital adequacy, but also liquidity harmonization reform. But what does it all mean for our industry?
Speaker 3I think, first, what it means, and this is going to be covered largely by our season four. It's, first of all, sound collateral management is now a central practice to all financing operations. Second, collateral management is a global reality. Third, access to central bank and central counterparties is crucial for financial institutions. The fourth point is around technology, and this is also what we cover in this second episode. If you want true optimization, you ought to be relying on technology. And fifth, diversity and transacting with as many counterparts as possible. So, fundamentally, I mean Clearstream's collateral lending liquidity solutions business line and the wider Deutsche Börse Group with the colleagues from Eurex repo has been designed with exactly these objectives in mind.
Speaker 1And I mean take us back a little bit further, just to the point historically where collateral management became so important, because a lot of this can be traced. We can trace the roots back, can't we? To post-crisis the G20, a lot of this regulation came in to try and mitigate risk, build more system resilience into financial systems and the way the banks finance themselves, as well as large market participants. But tell us, is this really just about risk mitigation or is collateral management taken on a different character and dimension over the last 15 years?
Speaker 3Well, you know that with financial regulation, the regulator enshrined certain reforms, but also, I think, when it comes to regulation, ultimately it translates into a ratio that financial intermediaries have to respect, and so it means that banks need to manage assets on their balance sheet. So it means that if you connect to central clearing, you benefit in terms of capital. It means, if you connect to central banks, that you have access to liquidity, and so the way these liquidity buffers work has a direct impact on the way collateral has to be segregated, mobilized, etc. So the management of these ratios and I can name some of them liquidity coverage ratio or net stable funding ratio mobilize the collateral in terms of what is actually eligible for liquidity coverage ratio and what is eligible for net stable funding ratio. So it's all driven by the need to maintain the levels of these ratios.
Speaker 1And there's been obviously something that came out in our last show was this idea that we're currently in a difficult economic environment for many of these operations that are related to securities lending markets, because spreads, returns are compressed and costs seem to be rising and haircuts aren't always very efficient and so forth. I mean, there's a lot of costs, isn't there that's entering this market, and I guess the goal for all market participants is to really optimize their collateral management almost in real time, if they can.
Speaker 3Yeah, I mean you mentioned optimization and we switched to that topic as well in season four. In terms of optimization, we look at it from the angle of transparency and visibility. So where do I have collateral and where does it sit and where does it need to be allocated at a specific moment in time. So collateral is also cash and non-cash. But what is driving also the optimization is earlier deadlines.
Speaker 3You know that we moved to T plus one, so this makes collateral velocity around the globe get even faster, because at specific time moments during the day collateral needs to be at specific points, so either at the central bank or at the central counterparty. So from a business development point of view, our team also focuses more and more on counterparties. So what we in the jargon understand by marriage broking, because marriage broking meaning that you have more opportunities actually to mobilize collateral if you're connected to more counterparties, and so that gives you multiple options where to place collateral best at any moment in time. Now, finally, I think, the benefits of netting and liquidity optimization in terms of not only you know where does the collateral sit and where do it needs to go, but also in terms of credit usage and also you know what does it give you in terms of capital relief? So it's all going to be about mobilizing collateral that gives the banks the most capital and liquidity efficiency that gives the banks the most capital and liquidity efficiency.
Speaker 1And, of course, we've talked a lot in previous seasons about Green Repo, about sustainability, about sustainability-linked bonds. We've got lots of those kinds of issues bubbling under on a regulatory front as well with the new ESDR regulation that I think is currently in consultation but coming soon. Yes, if he's just thought you could rest for a minute there, no, so I mean there is a change, isn't there? In a broader sense, financially about greening the financial system is really linked to collateral management.
Speaker 3Well, I mean, that's a topic which obviously is a bit of a different nature, but, if you want, I mean, what's going on on sustainable finance is that we're seeing the industry moving now into more what is known as impact financing. So it's not only ESG. Esg is really, you know, sustainable financing, but impact financing is also looking at not only the bottom line that you look at in the standard industry, but you need to look at the people, the planet and also the project itself. So it's like a three bottom line, not just one bottom line itself. So it's like a three bottom line, not just one bottom line, and that's, I think that's going to be the next wave that industries like ours have to have to manage.
Speaker 1You and I, as we always say, if you can remember going to a conference where blockchain wasn't the next big thing, then you're definitely old. So tell us, I mean, is blockchain going to make a big difference in central bank issue, digital currency? You said we'd be talking about that this season. You know I'm very excited about this. I don't get out much. Tell us more about the impact of technology in this world.
Innovations in Collateral Management
Speaker 3Yeah, I think that. Yes, certainly, central bank-issued currency is a topic, but you're talking about blockchain and distributed ledger technology, tokenization. I think, yes, there is going to be room for that technology going forward. Also, tokenization, I think, is something that will be playing in our industry a role going forward, a role going forward and um specifically. You know, uh, what clearstream is doing and, more precisely, clearstream international, as trusted third party is, um is going to be center stage in some of the the projects that we are running, uh in 2025 well, christian.
Speaker 1this is a perfect time for us to go over to the first of our special guests, garl Delorny. Welcome back to the show. You probably already know Garl, if you're listening. He is the global head of collateral at Clearstream. Prior to that, he was also heading the collateral management side at BNY for 10 years. He had five years at BNP Paribas another huge, obviously custodian there and also at JP Morgan. So Gael's CV reads it's a bit like a who's who, basically of custody and securities heavyweights, and the last time Gael was on the show was December 22, making predictions about what was going to happen over the course of 2023 and 24. Gael, welcome back. And also with your predictions, were you right?
Speaker 4All right, thank you, andrew, and good morning. Good morning everyone too. Indeed, a year and a half has passed now since we last chatted. I have to be honest, andrew, I did not listen to the notes I took two years ago because I hate to hear myself being wrong. So clear changing in power game, andrew, in the last few months clearly last year, 2023.
Speaker 4There's been the interest rates increase and as a consequence of that, we have seen increased in repo activity, whether it be cleared or unclear. We have seen new clients coming to market I see not really new clients, but that were in the market before. That kind of had disappeared for a few years with the negative interest rates and came back, and in that I'm talking about the corporates. And this clearly also came up at the time where we had the TLTO repayment. So the central bank sorry, the banks fighting their financing with the central banks and therefore immobilizing ISATs in monetary policies. So all this had a significant impact on us, right? We've seen volumes going through the roof on cleared repo and GC pooling. We have seen a clear increase in the regulatory party repo and securities lending activity.
Speaker 1Well, back then we were talking a lot about collateral scarcity and collateral immobility. Now we know that we're now in a period of excess liquidity and the scarcity period is over. But how would you sum it up?
Speaker 4Yeah, I think we are now talking about collateral abundance. So we move from collateral scarcity to collateral abundance, and this is exactly to the point I was heading to. So thank you, andrew, for the prompt. The assets, and so the TLTO repayment besides the fact that it has drawn more activity on the regular tripartite repo and less in the central bank pledges has also freed up a very large portion of HQL data assets, but also more illiquid assets. And this drove to another consequence the fact that optimization and I was just looking back to the point you made with Jean Robert on a previous podcast optimization has become increasingly important. Right, because the assets that were accepted by the central bank, being some of them fully liquid, had to be refinanced in another way. Right, and these assets have made their way to the street, and this is why tripartite agents, and Clearstream being one of the large ones, had to look for solutions to help clients get a better outcome, a better result in collateral optimization, so that assets can be freed up, and when I'm here, I mean assets.
Speaker 4Again, the ultimate purpose of a collateral giver, a borrower, essentially would be to free up HQLA, us Treasuries, sovereign debt in general, with a triple A rating. Now, at the time of collateral scarcity, these assets were just trapped in CCP, trapped in the central bank, trapped in other places. With the collateral abundance that we are seeing now, there's a mix of everything, but it doesn't mean that because you have everything, you can do everything. What we had to make sure that specific assets were locked up in some trades which were a lot more broad and a lot less stringent in the type of collateral they accept, so that HQLA, us Treasuries and others would be freed up for all the regulatory aspects UMR trades and NCCP clearing in usual margin posting for them.
Speaker 1Well, of course, there are other big forces at work shaping the world of collateral management, and that's why I'm going to bring in Priya Sharma here. You probably already know Priya, of course, as the global head of data and client connectivity at Clearstream, but Priya, prior to that, was head of innovation and change management at Citibank. Prior to that, she was working at Tata Consulting and also has been involved in change management at Citibank, so you know prior to that as well. So we're looking at a good 20 years innovating in the custody space. Priya tell us, you know it's not just about regulation and optimization. It's all about AI and data and data harmonization, data quality. Take us through these sort of big currents that you've seen evolving over the last few years in the world of collateral management.
Speaker 2First of all, andrew, thank you very much for inviting me today. It's my first time, but definitely, hopefully, not the last one. Been a couple of decades in the industry now, and innovation is not new right, and I've been working on transformation for as long as I remember now, so technology is playing a big role currently when we talk about data, and indeed data and AI are becoming catalysts for transformation across major sectors. For example, healthcare Physicians are now able to diagnose diseases much earlier. They can predict disease outbreak Analysts can predict weather patterns, improving farming practices to reduce impact of climate change. So even in our financial sector, ai is being used quite a lot. It's been used for fraud prevention, optimizing investment strategies, customer service and new product creations. These exciting technologies, I think, are a paving way for a smarter and exciting future for us all. Now at Clearstream, we are continuously focused and investing a lot in the space of digitization and data. Recently, we hit a big milestone with 100,000 issuances on D7, which is our fully digital platform, supporting up to 40,000 issuances per day.
Speaker 1There's also the SimCorp acquisition. Simcorp, by the way, apparently throw fantastic parties, just like the GFF Summit gala dinner. I'm told Hi, simcorp, I lost my invite last time. So SimCorp, of course, and you're partnering with Google. Tell us more about your sort of tech trajectory with those sort of acquisitions and partnerships.
Speaker 2Yes, and we have recently acquired Simcoe and we partnered with Google as a centering. They're important right and I think that they would enable us to innovate and scale further. They would allow us to better serve our clients and financial industry. We are already working with Google on some of the use cases. We are working with them on upgrading our cloud infrastructure and not just in TST. We're talking across BDAG right, deutsche Welt and similarly with SimCorp. We are really looking forward to ideate more and come up with certain use cases that can help our clients and the industry.
Speaker 1And Gael. Let's talk about marriage broking, because this really is an interesting innovation, because it's something that couldn't have happened just a few years ago, because the AI technology required to power systems like Oscar that can match market participants together, different counterparties with different needs and different, very specific requirements that didn't exist. So this is something that really is the beginning of automated solutions. Do you think 10 years from now we'll look back and laugh about collateral management and say, oh well, the computer does it all now? A little bit like we do about mobile phones, compared to the old large plastic rotary dial phones that everyone had in their house and was nailed to the wall.
Enhancing Counterparty Matching in Finance
Speaker 4I love the way you put it and clearly in line with where we are and where we need to go, actually. So I think we've been talking a lot about Oscar and I don't want to do any more of that outside of saying that this is an AI engineered portal, outside of saying that this is an AI-engineered portal and that clearly makes the life of our clients easier and accelerates the time we can put a trade to the market. Now to your point right, which is around making sure that counterparties are meeting up with each other in the right way. This is exactly the journey we engaged on over the last 12 months, developing OSCAR. As I said, oscar manages baskets and allows for the negotiation of those baskets. Now we also use the portal as a way to help clients face off with each other.
Speaker 4We have called that the marriage broking functionality, and this is a way that, by entering specific criteria about a borrower and specific criteria about the lender, our system kind of automatically generates a match or a universe of potential counterparties that we, as a tripartite agent and as a relationship team, try to manage.
Speaker 4So let's maybe take an example. Let's assume that you have a client, a, that wants to finance specific type of assets, we call that into the machine and the machine will just tell us oscar, oscar being the machine, the machine will tell us which counterparty could be suited for our client a right now. It is automated in the sense that again, it's oscar doing the job. It is not automated in the sense that again, it's Oscar doing the job. It is not automated in the sense that we want to keep the human relation right. Of course we could tell to client A this is a set of counterparties you could be talking to, right, that could be done and they could log into a portal. But we don't want to lose the opportunity of having that kind of one-on-one relationship that you develop over time. Where the client sees right, there's a good system behind, but I also have someone that I can talk to.
Speaker 1We often talk, don't we on the show, as though everyone is a giant bank with a massive back office that can manage, you know, scalable, complex systems. But, of course, one of these drivers for automation is the need for new market participants that are entering the repo space or entering the securities lending space, who have got cash that has to be used efficiently. We're talking about state treasuries and these kinds of things. So new market participants who are not dedicated to the finance industry. They need a sort of plug-and-play Netflix solution, don't they?
Speaker 4Yeah, we can see clearly some platforms emerging, and you can also see some big players either trying to partner with this platform slash, fintechs or develop in-house what is the functionality that they believe are suitable for their client base. So, absolutely correct, there is an increasing need, and the need actually comes from both fronts, whether it be sophisticated clients or non-sophisticated clients. At the end of the day, I think whoever you talk to, they have a specific bandwidth and they have to focus on specific things and they have the capacity to do that. If you look at an investment bank, they need to work on the investment, the state treasury, they have their own obligations and they don't have that kind of capacity to develop functionalities beyond their day-to-day, and so this is where a player like ourselves can just step in bringing some new tools and new solutions that meet that demand.
Speaker 1And Christian, I want to come back to you here because we need to ask the central bank question. Don't we, the ECMS, the European Collateral Management System, which is plumbing together all the central banks of the Eurozone that had a revised timeline published? I think that came out quite recently. So we know that there is going to be a faster, more efficient system for central banks, and that's going to be a faster, more efficient system for central banks and that's going to mean a faster, more efficient transmission of monetary policy. But tell us more about what the future of collateral management and central bank connectivity looks like.
Speaker 3Yeah, I mean it's clear that being connected to central banks is key and ECMS is obviously a key project in the Eurozone. I mean I mentioned a couple of regulations which are typically focused on the Eurozone, but collateral management has, as I mentioned in my intro, become also a global game and a global priority. So it's not just about allocating collateral in the Eurozone, it's becoming. What we do in terms of collateral management with Canada is like we actually mobilize collateral in a totally different legal environment. Collateral sits in Canada in legal environment under Canadian law, and it's completely regulated differently than what we're doing here on the European continent. So you have to juggle with all of those components.
Speaker 1How do you approach such a complex landscape and keep your development path on track?
Speaker 2In the realm of data science and delivery, we face different challenges that require careful consideration and strategic action. So we do have a strong data product development framework where we focus on end-to-end lifecycle, from ideation to launch and thereafter continued development and monitoring of the codes, then write data tools. Integrated platform and use of agile methodologies are important to create products faster, as well as swiftly adapt to the new requirements for clients, market or regulators. Then what we have done is we are really working very closely with our product partners operations, legal risk, our client services team, rms and so on and the data scientists. We have embedded them very closely in product space so they understand the product, they understand the challenges and we continuously get user feedback. This helps us in identifying pain points, enhancing usability. We validate features, we understand or get unique perspectives and ideas that can inspire new features or entail a new product. So we do encourage collaboration between data scientists, engineers, other business stakeholders and clients.
Speaker 2Then the fourth point is, say, data quality and consistency. Ensuring high quality and consistent data is paramount. Poor data quality can lead to inaccurate insights and flawed decision-making. So what we do is we have implemented rigorous data validation cleansing process to maintain data integrity. We have also launched. We have right data governance practices and we are continuously working on them. Then security privacy that's an important aspect again whereby we need to ensure that we protect sensitive data from breaches. Ensuring privacy continues to remain our top priority. We implement robust security measures, including encryptions and access controls, to safeguard our data assets.
Speaker 2And then scalability as the data volume is growing, our systems must scale efficiently. This involves optimizing our infrastructure, leveraging on cloud-based solutions to handle a large set of data without compromising on performance. And other challenges could also be related to, say, data interoperability, because we have now related to, say, data interoperability, Because we have now diverse systems, platforms and, with the proliferation of data sources and the need for real-time analytics, integrating and harmonizing data from various jurisdictions and counterparties can create complexities. So we definitely are working very strongly on creating a wide data fabric and data infrastructure. And, last but not least, regulatory compliance it's continuously evolving. We need to stay abreast to all the changes. We need to stay agile and adapt our system to meet these regulatory demands without compromising on data integrity or speed.
Speaker 1It sounds as though you've sort of brought in or are developing a DevOps kind of approach there at Clearstream. It sounds a lot like a Silicon Valley kind of tech company that you're connecting up data and putting all those silos together to have a much more global data view.
Speaker 2Absolutely, and our strategy we really think about is threefold. When you look at data strategy, first is, our vision is really to create data as a growth driver, both internally and for our clients. And when you look at strategy, our first pillar is building a smart infrastructure, a data infrastructure. We have been continuously decommissioning our legacy infrastructure. Right, and a good data ecosystem is really a backbone of any data-driven organization, facilitating everything from daily operations to strategic planning and innovation, so that becomes our first priority. Second is creating data as capability, facilitating everything from daily operations to strategic planning and innovation. So that becomes our first priority. Second is creating data as capability, both within our organization and for our clients, through new solutions and strong governance practices.
Speaker 2Cod, let me say, it's an omni-channel approach. Clients want data today through different sources, be it Xact, which is a client portal, or Swift or API, and even now, sometimes through file transfer. So how do we cater to that requirement? Now, all this is possible only through a right data culture and strong teams that are driven by client centricity, and we have been continuously focusing on that and we are creating various solutions right with settlement, collateral, lending, liquidity and so on for by partnering with our clients, by partnering with business right. So we are creating something that is of relevance, right and it's, and it's what it does is. It helps clients, you know, improve their decision-making process. It allows them to create better operational efficiencies.
Speaker 1Okay. So it feels like it's all happening right now, doesn't it? This is a real inflection point for the industry. We've got, you know, 100,000 digital issuances. Tokenization is well underway. We've had the first cross-chain repo settlements from HQLAX, so we know blockchain is in there. There is probably central bank-issued digital currency on the horizon. There are various other exciting things happening. It's a very digital moment. Legacy systems and processes are turning over. So, Gael, take us through it. Set out the new white heat of technology, sort of collateral management stall for Clearstream.
Speaker 4Okay. So, andrew, I'm glad you asked me this question. However, I'm not sure you realize which question you asked me, because I think I can be talking for about hours on this and I'm not sure you want to listen to me for so long. So I'll try to summarize, andrew. There's a large number of things that we have worked on and delivered over the last four months, and there's a few more things. When I say a few, there's a lot more things that we're also cooking for the future.
Speaker 4Now let me be focused on a few concepts. We have developed Collateral Mapper and that one. Again to the point you were making earlier on giving a tool to clients so that they can better invest and they can better optimize. This is exactly it. The system here, mapper, tells clients how much more of a specific asset type and we started with equity they could use, or how much spare capacity they had in equity in their allocation within ClearStream. That system had a lot of success and we are expanding it. As I said, it only touched on equities to start with, but we are going to deliver version 2 over the next few months, which will allow some kind of focus and optimization across multiple types of assets and multiple types of trades. So, mapper, please watch this space. There's more to come, but this is clearly a tool to help funding needs. We developed Client Dashboard and on that one, what is always surprising is talking to clients. We realize they don't even on their side. So we have the tool to have a clear view of what their portfolio looks like, and it can be major investment banks as well as less sophisticated types of investors. So we thought that there was a space where we could be delivering clients beyond their standard reports that go via Swift and the media, some kind of portal. In the same way as when you go to your bank, andrew, and want to check what is your balance. You have something which is user-friendly or a good visual, and that was missing. So this is something that we have delivered across a number of KPIs, so we can show repo rates, haircuts ratings, average balances, weighting of assets across geographies, et cetera. So that was developed and we are getting a very strong and positive feedback on that one. Reporting via API. I think this is becoming a standard.
Speaker 4One which I want to call out is central bank money, central bank money across, cleared and uncleared. The reason why I want to call that out is because not everyone can offer it, but Clearstream, being a CSD, has been able to develop that kind of solutions and that reduces the market risk because the settlement happens on T2S. Now I'm being technical here, but I think this will speak to some key customers. You were talking about the DMO and the straight treasury. This is essential for them, right? They don't want to take any market risk. Actually, they want to reduce it as much as possible. If you settle transactions on commercial bank money, you don't achieve that reduction. If you return central bank money, you get the reduction. So, again, unique offering from Clearstream, and that was delivered earlier this year. Other things we've done, and I think I will just add three more things and then I'll give you a rest. We have consolidated all our tripartite activities when I say all, it's all but one onto one platform. So we have all cleared GC pulling activity and the rest securities lending, repo and so on all on one platform, which was a humongous work and that was delivered toward the later part of 2022, but we could clearly see the benefits in 2023.
Speaker 4The second last thing I want to mention is optimization. Again, you mentioned it before. We have done a lot of work last year but coming to Frition this year, allowing clients to optimize in a different way. So we have changed the algorithmic logic. Up to now we were up to up to last year, we were mostly doing delta optimization. This year we are allowing for true three-way optimization and I'll come back maybe a bit later on today on the benefit this has. But this is very, very well received by clients. They clearly make very strong savings. So this was the one before last and the very last one I want to mention. Even though it has not been delivered, it is very, very close to be. I think we're just a few weeks away in offering optimization on haircut and again, this is something that was asked by the market for some time now and this is going to be given to our dear clients in the near future, very near future.
Speaker 1Now the Exact portal has been upgraded. But you know, when people say portal and they have a cool brand name and Exact is a cool brand name, so we've got the Exact portal. Give us an idea of the breadth. What is it that you can do now on the upgraded system? What have you added in there?
Speaker 2So overall it's rich in functionalities. Right, it has different modules. It's eight different modules. So in Settlement you can do instruction processing, you can query in, you can do your security positions. You can do your reporting as well on a real-time, intraday, daily, quarterly, yearly basis. So there's a lot there you can do.
Speaker 2In Settlement, sign Cash and liquidity. Again, you can create and process pre-advices. You can do withdrawal there is major cash reporting module. You can query withdrawal. There is major cash reporting module. You can query, view cash balances. Then when you look at asset servicing, you can quickly toggle into asset. You know corporate action notifications. You can query and view forecast of moments of cash and security proceeds. You can look at, again, asset servicing. Reporting is important so you can get very easy view on corporate action data in Xact.
Speaker 2The fourth say is tax. There are a lot of features and in future we want to introduce more features on tax side. But today you can query upon your tax refund, tax certificates. You can upload your files if you do, again, different reports on the tax front, you can monitor claims, exemptions on the accounts and so on. Similarly, you have collateral and collateral is a significant one because you have tri-party collateral management services, tri-party repo services, general services, pledges, et cetera. You can query for allegements, you can create matching instructions, you can do your overall collateral management, contract details, tech cards, concentration setups. Similarly, we also created API, by the way, on user management, whereby clients can automate their user management using API. We have that. We have various dashboard modules. You can create their own indicators, their calendars, tasks, alerts. Similarly, we have our funds businesses. We have a gateway to that.
Speaker 2Then again, on boarding side, testing side, there is a lot of work we are doing and now, as I was highlighting that, we want to continue to upgrade the UI, ux side.
Speaker 2We are upgrading the back end, but, more importantly, we are ensuring how do we give self-service to our clients through that. So earlier clients used to use, say, they used to send us queries over emails. Now they can use Exact for that and in future, with the use of AI, if we want clients to get answers to their queries in a more automated manner, they just type in and with the use of AI, we want clients to get answers to their queries in a more automated manner. They just type in and they get the answer of query, rather than waiting for a ticket to be raised, going somewhere, waiting for an answer. So that's the next step that we are targeting towards, and also continuously looking at exception handling capabilities, because when we talk about 3 plus one, et cetera, it's very important how do we navigate with outbreaks, how do we become more STP in motion? So this platform is currently allowing and would allow us to really manage our exceptions also in a more efficient manner.
Speaker 1Now, gal, let's look at the business side just for a second. Here you run the collateral business at Clearstream. You've run collateral businesses at some very large organizations over the years and you know that the issue market participants face is narrowing margins. Participants face is narrowing margins, narrowing spreads on high quality liquid assets and specials and those sorts of things, and at the same time the cost of compliance, cost of regulation, is constantly rising. The cost of technology is ever present there If you want to ditch your legacy systems and move over. So tell us, how do you address cost issues and formulate a business strategy? So, garth, I mean, is this really all about the elephant in the room which is the cost of compliance? It's the cost of technology, it's the cost of keeping up with the change and reducing your legacy systems. And is that all because we're in a situation now where margins are narrowing, profits are down and costs constantly seem to be rising?
Optimizing Collateral Management for Market Participants
Speaker 4It is true, cost is clearly on the forefront of our clients' agenda and priorities. I would say, though, not only right, I think revenue is still essential. Right, this is how you run a peanut Increase your revenues, reduce your costs, and the margin is just greater. How do we tackle that? I think this is exactly the point we tried to address over the last few years. If you look at the consolidation of the platform that I was mentioning, just a bit earlier.
Speaker 4consolidation means you have less I can take care of. All your assets are in the same place, so optimization mechanically becomes better, but also on the cost side, since you're adding to that. This also means that operations, our clients, middle offices and back offices don't have to worry about too many pools to manage at the same time If everything is in one place you just worry and focus on that one place.
Speaker 1All right, and I'm going to actually put you on the spot now and say okay, give us an example of how these tools can optimize costs, reduce costs and increase margins for market participants.
Speaker 4Different items we have worked on over the last few months, which I alluded to earlier, are, for instance, centralization of collateral onto one same platform. Benefits are multiple. One of them is cost savings, because you don't have to manage multiple pools, you just have to manage one. The savings are also actually the increase, also on the revenue side, where you can make better optimization, thereby making better use of your own inventory. That's one, that's what's for the centralization.
Speaker 4Another way to optimize costs or, here, to increase revenues, is again to look at the mapper in the way it allows you to better deploy your assets. If you know which assets you should be bringing to a collateral agent or a tri-party agent. Well, again, this is a benefit. You're not trying and it's not trial and error. You know what you have to bring. You just bring it straight away. Again, reduced reduction of operational costs, but also more efficiency in which collateral is allocated to a specific transaction. Right, but that's the second point I want to mention.
Speaker 4Now to your question. Give a specific example. I'll give you one, and I think this relates to discussions we've had with our clients since the beginning of the year where they told us and again, this is a great, great place to be, but they told us that they had saved over a quarter multi-million euros on the back of multi-billion savings of freeing up HQLA-type assets. Right, and that's again. I'm talking about the results as opposed to the example, but I just want to give you a teaser. Our clients are saying they're saving a large amount of cost thanks to better allocation and better utilization of the inventory.
Speaker 4Now how did we achieve this? I mentioned earlier we have the collateral optimization logic, which has changed from being an allocation and an optimization on the delta versus a full optimization. The full optimization allows for assets to be reshuffled within a specific day and not be trapped in a specific collateral contract over a few days or over a few weeks. So, constantly during the day and I say constantly, it's a few times and again, according to the client's needs but we are able to completely reshuffle the inventory across their set of accounts to make sure that the cheapest to deliver assets are allocated and the highest quality are freed up. As you free up those kind of HQLA, you help clients better manage their liabilities with their more stringent counterparts, such as the CCP and the central banks.
Speaker 1And for the regulatory matters, and Priya from the sort of innovation side, how do you set a sort of product development strategy or a data science strategy that is going to help reduce the costs for market participants?
Speaker 2I think it depends, right. So if you look at settlement products that we have created within settlements and here, by the way, I'm diving now to the settlement side because of your question and the regulations are imposing high penalties when it comes to fails, so what we have done is we have created various products that can allow clients to predict their settlement failure, for example, Look at different reasons why things are failing. We have created settlements inside stash pools and so on, cash flows and so on, whereby clients can really drill down into even T plus one, T plus two cycles. They can understand their settlement by asset type, by market, by currency, understand the reasons for failure and they can make corrective actions and reduce different penalties.
Speaker 1Well, sadly, we do have to start drawing these threads to a close, and that means it is time for the Clearstream crystal ball to come out. And, priya, you're going to get to go first this time, because Guile has already done some crystal ball predictions back in 2022, as we know. So this is your first time. And tell us what do you think is going to be the big picture for collateral management a year from now?
Speaker 2I think, uh, collateral optimization right and it has so many different meanings when we want to optimize your collateral money, whether, uh, we want to look at optimizing your collateral based on quality of assets, based on asset classes, whether you want to look at LCR, say, liquidity coverage ratio, we want collateral that's cheaper to deliver. Or you want a location-agnostic collateral basket, or QLR-eligible assets, and so on. So I think there are so many ways clients want to optimize their collateral and I think we are moving in a direction where we want to give these opportunities to our clients whereby they can self-service themselves and optimize the collateral.
Speaker 1Thanks, priya and Gael. I pass the crystal ball over to you.
Speaker 4I'll do my best guess and I think for one of them I'm not taking too much risk. We've seen increasing pressure from regulators and increasing regulations. I don't think this is going to change right, and not that I want to throw any more acronym. I will use concrete words. But what we're seeing in the US with mandatory clearing, mandatory cleared repo, is happening next year and then 2026. Honestly, that's US today, but I think the market is expecting that this will also come to Europe at some point and you know I would really agree with that. So more regulation. Now you know this is sorry. It's got more regulation, it is. So how do I need to make the link on this one? Because I want to keep the first part, andrew. Yeah, keep the first part, no that's good, I'll remember it.
Speaker 1Just say and, and then carry on. I'll chop that in.
Speaker 4Okay, so and so this is US market related. For the monetary clear report, this is likely to come into Europe at some point. This was one right, but there's going to be more. I would always count on regulators to keep us busy challengers and, at the same time, when there's a challenger, an opportunity. So I'm keeping positive on that front. Other things that I suspect we will see is, from the different players in the industry, the capacity to actually integrate the whole change of the financial markets, from trading to clearing, to custody, to collateral management. That's one aspect. Another one and we have already seen some of those movements happening Another one is clear investment from the players in the ability to deal with increasing pools of assets, and I don't want to disclose too much here because this is part of the big plans we have.
Speaker 4However, I hope, andrew, that you will invite me in the future so that we can talk about that again. It's still part of the crystal ball and too early, but I think it's on the mouth of everyone. Right, you have blockchain and this is something that we will have to deal with. There is crypto assets, cryptocurrencies again something on the roadmap and generally AI, to see how much more we can do with that, new technologies and I think everyone is watching the space. There's a few great ideas that are coming up. I think what we will see is the industry adapting to the challenges and using those new technologies to come with great solutions.
Speaker 1Okay, that is it. The clock has run out. So thank you for that, gael and Priya, and, I think, a huge virtual studio. Thank you to the global head of Collateral Clearstream, gael Delorne, and the global head of data and client connectivity, priya Sharma. Gael Priya, thank you very much.
Speaker 2Thank you, it was a pleasure.
Speaker 4Thank you, drew, always a pleasure.
Speaker 1Well, there we have it. That's a great August, special Christian and, of course, as we record this, I'm guessing you're off on holiday.
Speaker 3Yeah, I'm taking a break and I'm going uh biking and uh, yeah, when you say also, when you say taking a break.
Speaker 1I mean, you had at least one holiday where taking a break quite literally meant a limb at this point. So you are, you've got your pads on, you've got your shin pads and your safety equipment, you're all over inflatable suit like the michelin man, just just in case you fly off another mountain.
Speaker 3Yeah I don't think I should mention break anymore. So I'm going on holiday and so I'm actually going to be as well on the water. So going to be on a boat, which I think the likelihood I will break something on the water is not really likely, so I think I'm good, I'm fine this year.
Speaker 1I mean, I guess, unless you're taking the boat to Antarctica or somewhere where the water is a lot harder, hopefully you'll be fine in the Mediterranean. Good, I'm glad to hear that, and, of course, actually it's just a slightly interesting thing. This isn't just a summer holiday, is it? It's a regulated summer holiday and I think this is something that the audience maybe they don't all have to do this you, as a part of a market infrastructure firm and a senior leader in that space, you've actually got to take a mandated holiday, isn't that right?
Speaker 3Yes, it's a mandatory leave, so we get cut off our access, don't have access to our inbox, so I think it's to prevent us from doing insider trading. I see, yes, to be honest, I mean, we are not in the trading business, so we are post trade, so it doesn't really make sense for us well, listen.
Speaker 1Um, on that front, christian, I gotta say, have a fantastic break. Um, we'll miss you. Here in the virtual studio that's me and all my virtual friends, but also the production team behind the scenes. So a huge thank you to the Clearstream team, to Lear Patroli, their back at HQ, who manages our social media, and for everyone else who's helped bring this show together for season four. And I guess all that remains is for me to give a big goodbye to the BFF of GFF, friend to all the central banks in Europe. Vice president at Collateral Equity and Lending Solutions. Yes, I know he hates me using his real job title my co-host, without whom there'd be no show, mr Christian Rossler.
Speaker 3Thank you, andrew, I prefer the co-host.
Speaker 1Great, good. And so, from me, Andrew Keith Walker, and from everybody here at Clearstream, have a good August. If you're getting a break, enjoy it, and we'll be back in September with another show. And do remember to join us on our LinkedIn page that is linkedincom slash company, slash Clearstream, where you can network with Christian and with Gail and with Priya and with everyone else who's on season four, and even catch some sneaky social media behind the scenes vids as well. And in the meantime, from me, andrew Keith Walker, and my co-host, christian Rossler, goodbye, bye-bye, and don't forget. This show is brought to you by Clearstream Banking, one of the major sponsors of the GFF Summit each year in Luxembourg, and features members of the Clearstream team and special guests expressing their personal opinions, not the opinions of Clearstream as an organization. And, of course, don't forget that not only information in this podcast should be taken as legal, tax or other professional advice. See you next time.