The companies announced their intention to launch the JV last year and now plan to roll out two services starting in the middle of next year.
The first roll-out will be of its Margin Transit Utility, which aims to provide straight-through processing for the settlement of margin calls and will begin testing in mid-2015. After that, the firms plan to roll out a Collateral Management Utility to help clients optimise collateral allocations.
“The company will play a critical role in helping the industry address capital and operational challenges resulting from the vastly increased volume and velocity of margin movements anticipated under [new] regulations,” said Michael Bodson, president and chief executive of the DTCC.
Collateral services have become increasingly important as Dodd-Frank and EMIR reforms push over-the-counter swaps into clearing where high-quality assets are required as margin for outstanding positions. Basel III reforms also aim to incentivise market participants to use clearing by increasing margin requirements for uncleared transactions.
Both regulatory tracks are expected to force a drain on eligible collateral, with estimates across a number of private and public entities ranging between US$500m to US$10trn.
The DTCC-Euroclear JV aims to reduce the cost of those requirements.
”The creation of this joint venture company will deliver to our clients increased efficiency and reduced costs within the highly-fragmented and complex collateral management industry,” said Euroclear CEO Tim Howell in a release.
The JV mayalso serve as a useful tool for regulators hoping to identify systemic risk in the derivatives market.
US regulators, in particular, have been struggling to parse and analyse a raft of OTC derivatives data now in their possession since the implementation of Dodd-Frank reforms over a year ago.
They have admitted they would not be able to catch another ‘London Whale’ under the current structure because the data is being shared across multiple repositories in different formats. The data is in need of centralisation or standardisation but a full solution has yet to be developed.
The Financial Stability Board two weeks ago released results of a feasibility study regarding the aggregation of OTC data that added credence to the push for centralisation. The Board recommended that a physically or digitally centralised repository be created to solve the data-sharing bottleneck
DTCC executives told IFR last year the new JV may be an initial step towards an eventual solution. (see story “DTCC and Euroclear team up on collateral venture”)
Ultimately, a centralised repository would mean big business for a number of firms – so a regulatory decision on such a mandate is likely to be drawn out.
