The financial landscape has evolved over the past five years with the heightened expectation that market infrastructures will further refine their risk management models and focus on asset safety. The lessons from the Global Financial Crisis have taught the industry that the need to restore stability and confidence is a market imperative for the greater good of not only the financial system itself, but also its reputation as a whole.
As a result, increasing demands are placed on local market infrastructures to meet the wave of regulatory, technological and operational changes required to restore confidence in the system. In our role as a Central Securities Depository (CSD) and a key Financial Market Infrastructure (FMI), Strate’s core purpose is to mitigate risk and bring efficiencies to the post- trade environment in South Africa. We aim to inspire confidence in our financial system by providing a world-class infrastructure to both the local and international markets.
However, in these fast-paced times of change, staying abreast of regulatory reforms, market developments and ensuring their implementation, can be a challenge for any market. I have always maintained that Strate’s success has been built on collaboration and key strategic partnerships. Since its inception over 14 years ago, we have been able to create one of the most advanced and highly-rated CSDs in the world. It has been through partnering with global market experts, such as Tata Consultancy Services (TCS), SWIFT and now Clearstream, that has placed Strate and the South African financial markets where we are today.
Historically, the CSD industry has always been a collaborative one with an active number of international forums and regional associations. These forums have been broadly used to share and gain knowledge of other markets, including operating models, future initiatives and trends. We have been no stranger to these as Strate has been an active member of various associations, including the Americas Central Securities Depositories Association (ACSDA), the Africa and Middle East Depository Association (AMEDA) and the Committee of Southern African Stock Exchanges (CoSSE).
Strate is actively involved as a member of the World Forum of CSDs (WFC) and is currently the WFC Secretariat. We have also been appointed as the WFC representative on the ISSA (International Securities Services Association) operational committees.
Collaboration is stepping up a gear
Post the crisis, CSDs are now forming strategic partnerships with one another to deliver on their mandates. These alliances are helping local markets drive and provide change at a pace they would not have achieved on their own. As FMIs, we share a common purpose in our markets, and, as opposed to developing solutions in isolation, cross-border collaboration, cost containment for the market and information sharing make sense.
Much like many market infrastructures in other countries, Strate does not necessarily have the funding, resources or international knowledge to be developing solutions in isolation, so we have often used the mantra of ‘don’t re-invent the wheel’. With the intricacies of local markets varying, along with different regulatory environments, collaboration allows for the speedy implementation of changes that can be customised for local market requirements.
Importance of collaboration
This cannot be highlighted more than by the recent announcement of a collective effort in the CSD industry – one that aims to address one of the biggest challenges facing our financial markets – a pending collateral crunch.
The Global Financial Crisis effectively changed the global financial landscape. Regulators around the world began to make risk avoidance their top priority and they reinforced this through new regulations, such as Basel III, Solvency II, Dodd- Frank Act, European Market Infrastructure Regulation (EMIR) and others. These regulatory changes have significantly altered the capital adequacy requirements for financial institutions, and as the so-called ‘collateral crunch’ unfolds, these institutions will be required to collateralise more of their financial transactions and ensure efficient collateral management and optimisation. In many instances, these institutions are turning to CSDs that offer Tri-Party Collateral Management services.
In response, we as the CSD in South Africa are collaborating to meet these demands by sharing knowledge, expertise and know how on the matter. As a result, the announcement and launch of the association, Liquidity Alliance, in January 2013 was met with much fanfare in Europe and across the globe.
This association comprises of five organisations which share a similar approach to the looming global shortage of collateral, namely:
- The Australian CSD ASX,
- The Brazilian CSD Cetip,
- The ICSD and CSD Clearstream,
- The Spanish CSD Iberclear, and
- Strate in South Africa.
These five market infrastructures (four central securities depositories and one international central securities depository) have decided to leverage off the same collateral technology platform and share their expertise, experience and efforts in creating a solution.
Strate itself announced in 2012 that it would be providing a Tri-Party Collateral Management solution for the South African market using Clearstream’s Liquidity Hub GO (Global Outsourcing) product, which enables the Clearstream functionality to handle all the administration (validation, selection, mark-to-market, margin calls, substitution, optimisation, etc.) while the assets remain in their domestic jurisdiction. This is the technology of choice for the Liquidity Alliance partners and, therefore, it is only natural that we collaborate with each other to roll out this service in our own markets.
The Liquidity Alliance
As a member of this Alliance, we believe that forging these partnerships with other like-minded infrastructure partners, is the most sustainable and efficient way of extending our reach and, in future, cross-border collateral transfer and optimisation on a short-time-to-market basis.
By ultimately meeting the requirements of our markets, we will effectively find solutions to this truly global problem.
While many of the members of the association are already working together on a bilateral basis, the Liquidity Alliance provides a formal platform to enable greater cooperation and joint communication efforts amongst our members.
As an open association, members exchange information, recognise common needs and can potentially identify collateral solutions for our local markets by leveraging off the expertise of others, as the association remains a neutral source of pan- industry information, ideas and opinions. Participants have agreed to meet each quarter to discuss partnership plans, key developments, commercial opportunities in collateral management and share individual market news while also investing resources on studies and industry research.
Already, some Liquidity Alliance members have commissioned research that will contribute to and enrich industry understanding. The Liquidity Alliance hopes that initiatives such as these will help towards its aim of being an industry thought leader.
One of the critical aspects of the association’s members is that we share a common view on the global collateral problem. The solutions we deliver to our local markets must ensure that we maintain the assets under custody within our own jurisdiction, enabling a solution for our local market players to mobilise their collateral efficiently.
This approach strengthens the local infrastructure providers and widens the relationships we have with our stakeholders. As a result, the Liquidity Alliance members can leverage off the intense consultations with other collateral users, regulators and the central banks of all its members. By each of us acting as an independent and sophisticated collateral agent in our own market, we ensure alignment with local rules and pressing regulations, following the local business priorities. The fact that the members are from different regions around the world means we bring together a unique pool of global knowledge, insight and expertise. This enables the Liquidity Alliance to be a trusted source of valuable information in our own markets.
I was fortunate enough to see the fruits of, and be part of, this active collaboration within our market as Clearstream hosted its 17th Global Securities Financing Summit in Luxembourg with almost 1000 delegates in January 2013. The event brought together professionals from our industry, including banks and corporate treasuries, repo and securities lending desks, fund managers, central banks, CCPs, regulatory bodies and infrastructure providers who were all debating the future of collateral management.
Liquidity Alliance’s official launch at the event was positively met. We look to build on the collaborative efforts that have already been seen with Cetip in Brazil using the Clearstream Liquidity Hub GO system which will be rolled out with some of the other Alliance members later in 2013. Sharing experiences and information from countries like Brazil will not only speed up the development and rollout, but in a common vision for the future that the Liquidity Alliance members share, it will also ensure seamless connectivity leading to a less fragmented global collateral pool and potential for collateral optimisation.
All market infrastructures who share a common view on the global collateral problem and who agree to use and leverage a common technology infrastructure can become a member of the Liquidity Alliance. The reaction to this initiative has been very positive and interest has been seen from infrastructures globally. We anticipate other organisations coming on board this year to leverage from the Liquidity Hub GO infrastructure. These market infrastructures are then invited to partner with us by joining the Liquidity Alliance.
Together the CSD industry can truly come to the fore in solving this global problem and meeting our clients’ and the market’s needs.