Philippe Seyll: Ready for monetary policy’s return to normal
This article was first published in Börsen-Zeitung (in German) on 20 February 2018.
Clearstream’s Philippe Seyll speaks about the phasing out of central bank quantitative easing, its effect on collateral availability and other market trends.
Philippe Seyll, co-CEO of International Central Securities Depository (ICSD) Clearstream Banking S.A., sees markets at a turning point, as he explains in this interview with Börsen-Zeitung. He sees the importance of collateral management and securities lending increase when monetary policy phases out. But there are also regulatory pain points.
Ready for monetary policy’s return to normal
When speaking to Börsen-Zeitung at Clearstream’s GFF Summit in Luxembourg, Philippe Seyll, co-CEO of International Central Securities Depository (ICSD) Clearstream Banking S.A., explains that the predominant effect of central banks' quantitative easing (QE) policies has been to reduce the amount of collateral available on the market. He says that he does not perceive a general shortage of collateral, but above all of so-called high-quality liquid assets ("HQLA").
Seyll cites a 30-year German Government bond maturing in 2042 – and having an attractive yield – as an example. When a futures contract for which this bond was deliverable matured in June last year, Clearstream noticed a shortage of deliverable securities in the market. Clearstream was able to detect this because the securities settlement agent (which is part of Deutsche Börse Group) is responsible for executing securities lending – via the Automated Lending and Borrowing Mechanism, as part of the ECB's Asset Purchase Program ("APP").
Collateral will return
"This situation will change", says Seyll, citing a Wells Fargo survey according to which QE measures by global central banks absorbed more G10 sovereign bonds over the past two years than new issues by these countries. He explains that in 2018, central banks will only be absorbing around 40% of new issuance – holding the possibility of providing relief for the collateral market overall. "This is good news, given that regulators require stronger collateral coverage by market participants", Seyll says.
He sees these regulatory requirements as “an important prerequisite for stable markets”. And Deutsche Börse Group and Clearstream provide support on this end: "Regulators initially requested that sell-side firms provide coverage for their transactions. Now they extend this requirement to also apply to buy-side names – which are not fully equipped with the right settlement systems and the proper collateral pools. Which is why they are using our solutions, for example", Seyll says.
Cost reductions are possible
He points out that a more extensive use of collateral may indeed lower the cost of collateral management – which would in turn enhance the attractiveness of corresponding collateralised transactions: "We are anticipating a favourable trend here." The new equilibrium created as a result is expected to transform Clearstream's lending operations, with the collateral business accelerating at the same time.
He notes that the alignment of the Global Funding and Financing (GFF) services at Deutsche Börse Group last year provides a broad range of options from a single source: participants may settle transactions on or off-exchange, with or without clearing. As Seyll explains: "There is electronic trading and centralised clearing, i.e. GC Pooling, – but likewise, there is electronic or bilateral trading without centralised clearing, i.e. triparty repo and e-triparty repo." He reports that GFF use is increasing, with both sell-side and buy-side users, from fixed income to equities.
According to Seyll, Clearstream's role in implementing monetary policy measures taken by central banks is a key factor: to what extent – and how quickly – will they return the securities bought within the QE framework to the market? How central banks proceed will be relevant for market pricing, he believes, explaining that they will assign infrastructure providers offering collateral management services a role in the normalisation of monetary policy. "As a pan-European market infrastructure, we are ready to play a role in the soft landing of the ECB’s QE strategy,” Seyll states. In his view, the market infrastructure provider's ability to ensure anonymity is important – whether looking at Clearstream or Eurex: "It is not visible who brings the assets back to the market – and who buys them." Seyll notes that Clearstream will work closely together with pan-European central banks and the ECB to implement the various elements of the normalisation process.
He adds that T2S, the European securities settlement platform operated by the Eurosystem, will also be playing a role in this context: "T2S will reduce the cost of central banks unleashing liquidity in the bond market", Seyll points out. Clearstream pursues the concept of an investor CSD holding securities in other markets on behalf of domestic investors – via T2S. "We have made quite good progress in this respect", Clearstream's co-CEO points out, explaining that for market participants, using a single point of access to all markets is cheaper: "This is where T2S provides cost savings."
Seyll sees opportunities in securities lending: he explains that, acting as a principal lender within Clearstream's lending programme, the company lends securities to the central counterparty (CCP) of derivatives exchange Eurex – which acts as a guarantor between two counterparties in a derivatives transaction.
In regulatory terms, he says that Clearstream is particularly affected by the EU Central Securities Depository Regulation (CSDR) – which, however, he considers to be manageable. He adds that Clearstream is not comparable to agent banks providing investment services to clients. "We are different", Seyll says. He explains that in essence, regulation requires more stable, more secure, simpler and more transparent markets. According to Seyll, Clearstream is at the end of the services chain. To him, regulation is nothing new, but "wind in our sails".
Buy-in as a challenge
For Belgian-born Seyll, the Central Securities Depository Regulation (CSDR) represents a challenge to the market. He shares concerns that the repo market might be impaired by the introduction of mandatory buy-ins, and by fines imposed for failed settlements. "Repo transactions account for one-third of what we collateralise; one-third is driven by what central banks use us for in terms of collateralisation, and the remaining third originates in securities lending. But we are not merely a provider of repo services – we have varying approaches". Seyll refers here to flexibility. In his opinion, mandatory buy-ins will "definitely be a burden for the repo market. This is a market that is already expensive. Low interest rates have reduced its attractiveness. Regulatory requirements for transaction collateral are an impediment, and additional duties such as buy-ins are a further obstacle." He believes that buy-ins will impact upon the already tense situation for scarce – and hence, expensive – collateral: "We find ourselves at the centre of unintended consequences of overlapping regulations. Nobody had the intention of damaging markets – but regulations which are remote from the repo market have an impact upon it."
Seyll states that the tapering of liquidity provided by central banks will also influence the cash side, adding that all these factors are variables: "If more assets are returned to the market, thus strengthening the repo side, the impact will be less onerous."
Seyll is “content” with market acceptance of the services offered by Deutsche Börse and Clearstream under the GFF (Global Funding and Financing) brand. He observes (formerly separate) repo and securities lending units being merged in the market, both on the buy-side as well as with institutional asset managers. "This means that we have a single point of contact – so our clients can benefit from (cost) synergies across the entire value chain at Deutsche Börse Group." The Clearstream executive notes that associated supporting processes are decisive, observing that transaction spreads are so thin that a lack of process know-how may actually scupper a transaction.