ABN AMRO Clearing, EuroCCP, Euroclear and Nasdaq have completed a joint proof of concept to make the use of securities more efficient when used to cover margin calls, including after business hours, using blockchain, or distributed ledger technology (DLT).
This solution addresses significant business challenges and inefficiencies related to the current provision of collateral to Central Counterparties (CCPs) and has demonstrated that a shared, resilient network can be built between collateral givers, collateral takers and intermediaries.
The inefficiencies of collateral processing have been heightened as a result of recent market changes such as extended trading hours by stock exchanges and the requirement to centrally clear derivatives traded bilaterally (OTC) under the European Market Infrastructure Regulation (EMIR). Today, a CCP margin call typically needs to be covered by euro collateral within a short time frame. After the regular hours of central banks and central securities depositories, usually ending at 18:00 CET, options are limited. Several CCPs currently allow for the use of securities to cover intraday (evening) initial margin calls, but this method is rarely used due to inefficient and complex securities delivery processes.
As an increasing number of buy-side market participants centrally clear their derivatives trades, the need to provide an efficient securities collateral solution has become essential. Using the solution developed in the proof of concept, parties were able to handle the margin call, the securities collateral delivery and the return process within minutes. Clearing participants and CCPs were able to optimise their collateral positions through a collateral dashboard.
The underlying collateral transfers were processed by Euroclear’s Central Securities Depository, ensuring settlement finality and regulatory compliance.
Nasdaq developed the proof of concept for the DLT nodes while ABN AMRO Clearing, EuroCCP and Nasdaq Clearing developed a specific front-end and managed integration into their own environments.
Coen van Walbeek, Global Head of Treasury and SBL at ABN AMRO Clearing said: “With a faster and more globalised market, it is essential to make the processing of collateral more efficient. Expanding the possibilities to use securities as collateral will make clearing through CCPs more attractive and cheaper for buy-side market participants. This is a breakthrough for the CCP model.”
Diana Chan, CEO at EuroCCP said: “We are excited to be partnering on a proof of concept that is extremely useful for transactions that are not already well-served by market infrastructures. With a solution like this in place we will be able to efficiently provide counterparty risk protection of equity trades after hours while reducing operational complexities. Today we are limited by European banking hours or arrangements in other time zones.”
Walter Verbeke, Global Head of Business Model and Innovation at Euroclear added: “As a major collateral house, holding € 28.5 trillion worth of assets, we are pleased to participate in this initiative. It demonstrates that a smart combination of NewTech and the resilience of the Central Securities Depository can work effectively and in full compliance with regulatory requirements.”
“As both a leading market technology provider and a CCP operator, Nasdaq is uniquely positioned to bring efficiencies to collateral management. We believe that blockchain technology brings with it a huge potential to transform markets everywhere, and this project is an excellent showcase of this,” said Julia Haglind, CEO of Nasdaq Clearing.