At the Heart of the Market

This article was first published by Securities Finance Times.

Sam Riley, CEO of Clearstream Securities Services, reviews the European capital market and the firm’s steps to sustain interoperability across the continent.

Leading Clearstream Securities Services for the past three years, Sam Riley has witnessed the highs and lows of an evolving market. The interest rate environment has kept the industry on its toes, while the impact of quantitative tightening on the bond market has changed the dynamics of the firm’s triparty repo business.

“We’ve moved from having a high demand for certain securities to the market being flooded because of quantitative tightening, causing less demand and more supply,” Riley explains. “Margins on securities lending have significantly dropped, even though we've increased our outstanding position of security lendable assets, the market has been quite diluted.”

Notably, and on a more positive note, the triparty side is seeing a larger increase in buy side firms, such as asset owners and pension funds, that are providing liquidity to the market. While for banks, picking up on this liquidity as cash is more expensive, products like GC Pooling are seeing success for Clearstream.

With evolving markets come new trends and opportunities. The increasing interest in exchange traded funds (ETFs) securities borrowing and lending (SBL) for instance, has not been lost on Clearstream, which has welcomed the addition of ETF lending to its offering. Further, recent movements have seen the firm expand its collateral management services.

In October, Clearstream signed a Memorandum of Understanding (MoU) with the Securities Depository Center Company (Edaa), a subsidiary of the Saudi Tadawul Group. Building on its previous work in Canada with the Canadian Collateral Management Service (CCMS), the firm will look to bring new services such as collateral management, SBL, fund services, and digital securities to the Kingdom of Saudi Arabia.

“The clients of Edaa will be able to operate these products with finality in the local market whilst at the same time, all of Clearstream’s clients can use the local triparty platform or lending platform. We're also exploring other jurisdictions, and other clients,” Riley confirms.

The expansion is made possible with CmaX — a system used by Clearstream for triparty and lending, and which is 100 per cent on the cloud and therefore available across various jurisdictions. CmaX is also separate from its core asset servicing and settlement platform, preventing time zone related restrictions.
While it takes steps forward to expand and innovate, the central securities depository arm of Deutsche Börse Group has much work ahead as it navigates Europe’s complex layers.

Harmonising capital markets

Interoperability is more than a simple buzzword, it is key for the market to tackle upcoming regulatory initiatives such as T+1 in Europe and to strengthen capital markets. 

In March, Ursula von der Leyen, president of the European Commission (EC), announced the EC’s strategy for the Savings and Investments Union (SIU), with the aim to offer EU citizens broader access to capital markets and better financing options for companies while boosting economic growth and competitiveness. By developing integrated capital markets, alongside an integrated banking system, the SIU aims to connect savings and investment needs.

According to Riley, the new boost by the EC has played into Clearstream's strategy. He explains: “Ever since TARGET2-Securities went live in Europe as a settlement platform across Europe, we were always of the view that in order to make the most of this interoperable landscape that was being built by the European Central Bank, we needed to offer connectivity to all the central securities depositories.”

Clearstream has now connected with all euro-denominated central securities depositories (CSDs) in Europe, with its German CSD Clearstream Europe acting as the entry point into the continent. The use of the firm’s Pan-European CSD solution will allow clients to choose to connect to all CSDs in the region, or to connect to a select few.

As a second step toward interoperability, Clearstream has connected to all major and central clearing houses. Riley indicates this is fundamental in solving technical and regulatory challenges. For instance, Riley refers to TARGET2-Securities (T2S) cross-border and allowing transactions to happen more freely, which is already in progress.

“We've had one bigger change put in T2S by the European Central Bank this June, and there will be further additions in November next year, which will make cross-border much more accessible and easier to use for the clients,” he continues.

“Member states need to incentivise saving. We've got somewhere in the region of €11 trillion of cash sitting on accounts in Europe and it’s not being invested.”

In terms of regulation, Riley is keen to see harmonisation on taxes. This refers to, for example, further aligning withholding tax processes and the ability to incentivise investment. He explains: “Even from a process perspective, we have to deal with every individual jurisdiction, we try to make that as seamless as possible for the clients, but the reality is, underneath there are 27 different ways of doing something.” 

He also highlights the significance of understanding the entire value chain, noting that post-trade “is the engine room where everything happens”. He continues: “But when you talk about capital markets, the first thing you think about is listing and trading, and equities and fixed income, but you don't think about corporate actions or tax processes or issuance processes.”

Discussing the challenges towards a more harmonised capital market, Riley notes that the European capital market has shrunk significantly over the last 10–20 years compared to other markets, and particularly the US market. “We’ve had this tech hype in the US; we've got the Big Seven; and Nvidia is now worth US$5 trillion and is bigger than a number of European markets.” In the last 10 years alone, he notes the European market has shrunk by 44 per cent in terms of the market cap. “Member states need to incentivise saving. We've got somewhere in the region of €11 trillion of cash sitting on accounts in Europe and it’s not being invested,” Riley highlights.

From the Clearstream perspective, neobrokers and neobanks are displaying a generational change of investors, some of which are “redesigning the landscape”. Since the pandemic, there has been a “huge hype” in fractionalisation of shares, Riley explains, adding that in Europe, 49–50 per cent of the investments into the ETF market by the retail space is in fractional saving schemes.

“Today, Trade Republic uses us as one entry point into Europe, and they do that for their German, Spanish, and Italian business etc,” he adds. “They're now able to use their access points to retail clients and aggregate that across Europe and channel it in through one provider, which is through us.”

At the same time, business-to-business-to-customer (B2B2C) providers are challenging the different regulation requirements of financial transaction tax, or differences in withholding tax in different regions, and are, as Riley notes, “having to come up with complex process changes to be able to deal with that”.

Concluding, Riley asks how the market can mobilise and incentivise savings. He states: “Generally, incentivisation is through some type of saving scheme, tax efficient or at least capital efficient in that sense. We've seen that with the new government in Germany, there's an increased focus, for example, on the capital market, on the financial services industry. “We need to start streamlining some of the legislation — and its tax, securities law, and solvability law, those are probably the three biggest things.”

A digital discussion

On the mind of many firms is the move to an increasing digital age. For Clearstream in particular, there is a great focus on digitising baskets of securities and exchanging the digitised token — an initiative the firm is working on with HQLA^X.

Riley explores: “The biggest hurdle, quite honestly, has not been the technology, necessarily, but it's been around the legal frameworks and getting the industry akin to this new way of doing exchange of tokenised collateral baskets.

“Tokenisation is the next generation. We've been focusing on digitisation, which is in line with regulatory change and not having a global note when you issue a security, to now moving into the real digitally native tokens, being able to take existing assets like ETFs, tokenising them, and then bringing them to markets that are not connected with real-world assets.”

Most notably, Clearstream recently launched D7 DLT, a novel tokenised securities platform which is designed to facilitate the issuance and management of securities, based on distributed ledger technology (DLT). Adding to the firm’s current D7 digital issuance platform, it will provide clients with the choice between digital and tokenised issuance.

D7 DLT will first be rolled out into the international market and available to issuer clients of Clearstream Banking, with the intention to enhance the firm’s eurobond offering. According to Clearstream, the first expected issuances are commercial papers and medium-term notes — both of which will benefit from the speed of issuance, allowing treasurers to generate funding on an intraday basis.

The platform focuses on three core benefits: streamlined issuance and lifecycle management; enhanced transparency and security; accessibility and interoperability. While the platform aims to build trust and foster greater efficiency in post-trade processing, it also allows for integration with existing market infrastructure, and with trading venues such as Deutsche Börse Group’s 360X multi-lateral trading facility (MTF).

Taking a step forward in the firm’s mission to innovate, Clearstream launched its smart realignment. The idea centres around addressing a liquidity need in T2S by transferring fixed income from the ICSD into T2S, pledging it to the central bank to obtain cash for funding equity clearing and settlement. An asset class that is particularly realigned between T2S and ICSDs, according to Riley, are ETFs.

“Through D7 DLT, we'll be able to take from digitisation to tokenising existing assets and moving them onto different platforms. That's going to be the future.”

D7 digitisation and digital issuance of ETFs will become key, adds Riley, who also suggests that the speed to market is important for issuance. However, one barrier in the primary market is that it runs on a T+3 basis as opposed to T+1. Therefore, there is a market need to make those processes much more efficient.

Riley states: “We've just launched D7 DLT and we're also going live in Luxembourg, where we issue many ETFs and of course Eurobonds. As we move into the world of tokenisation, you're going to see existing real-world assets, ETFs, being tokenised and exchanged.

“Through D7 DLT, we'll be able to take from digitisation to tokenising existing assets and moving them onto different platforms. That's going to be the future, especially linked to the behavioural change of the new investors. There's probably going to be quite a shift in how ETFs work.”

While Riley believes there is enough market infrastructure in place to help support the surge in ETFs, he believes the market must “grease the wheels” and make interoperability much more efficient.

He concludes: “We've got a huge international market that we've run out of Clearstream Europe. If you look at the regional exchanges in Germany, and the number of market makers that are there now, and the number of neobrokers and neobanks that are setting up, we're right at the heart of what's happening.”