Dennis Mullany
Euronext

Euronext head of collateral services Dennis Mullany and Drew Nicol discuss the imminent launch of Euronext’s Collateral Exchange platform, which promises to tap into fresh collateral sources in the funds and commodities markets

Can you outline the core characteristics of Euronext’s new trading platform?

The new collateral trading platform is the second of three components of Euronext’s collateral services offering being launched in 2017. The service aims to unlock new sources of collateral liquidity by creating electronic warrants to represent commodities, tapping into the underutilised funds market for collateral and supporting them alongside fixed income and equities.

The platform is web-based and will initially support repo across all asset classes with plans to support stock loan in the future. It’s an all-to-all platform, thereby maximising potential counterparties available for our clients and improving pricing potential. We’re looking at high-volume fixed income all the way down to bespoke commodities financing.

Alongside the trading platform is the inventory management service, which acts as a registry for the purpose of creating electronic certificates and warrants that can be used for the settlement of futures contracts, as well as for finance. Euronext saw the creation of electronic warrants as an opportunity to introduce efficiencies into the settlement of our commodities futures contracts by facilitating electronic transfer of ownership. The registry went live in February and the trading platform is expected to launch in July.

The third component is a collateral optimisation module, which will go live later this year. All three new services come under the Euronext Collateral Services umbrella.

What sets this platform apart from its peers in this field of services?

Essentially, it’s the full set of asset classes on offer in one place through the trading platform and the integration of Euronext’s other components that provide a unique offering.

Our clients will be able to manage assets of all kinds in one place, to settle futures contracts, create liquidity through repo, and engage in collateral transformation. Additionally, through the optimisation tool, they will be able to see a single statement with all the assets on it, alongside suggested uses for those assets.

Furthermore, in terms of comparing our platform to its existing peers in the market, they tend to support high-volume fixed income trading, along with some equities. Although there are other peer-to-peer solutions that are technically competitors, none of these offer the full range of assets that we will. As a consequence of supporting more assets, we also expect a much wider range of participants than would be available on other platforms.

What interest have you had so far in the platform?

There are a number of corporates based both in the UK and mainland Europe that are interested in fixed income transformation and repo. We are also in talks with two banks, which between them account for 85 percent of the agricultural financing in France. Euronext has a strong presence across continental Europe and the UK through our relationships with issuers, clearing members and trading participants, which will help us gain traction.

What was the initial driver that led to the creation of these tools?

In the current regulatory environment, banks are being forced to set aside increasing amounts of capital to offer liquidity services, which is resulting in increasing costs and, in some cases, limited availability of services to their clients. And so a number of firms talked to us about the need for direct access to over-the-counter markets for liquidity.

The feedback from our customers that trade on European exchanges was that, due to the mounting regulatory constraints created by regulations such as the European Market Infrastructure Regulation (EMIR), UCITS, the Alternative Investment Fund Managers Directive (AIFMD) and the fourth Capital Requirements Directive (CRD IV), sourcing liquidity was becoming an issue.

The result is that banks are passing down prohibitive costs, at a time when their underlying clients need to manage new requirements of their own, such as variation margin.

Why do firms come to Euronext specifically for a solution?

Euronext has existing relationships with a wide and varied set of industry clients and our discussions with them brought this particular issue to our attention as we had the capabilities to solve it.

The current liquidity market seems to cater primarily for fixed income in terms of repo and equities in terms of stock loan. However, the wider range of products being traded on the Euronext exchange around investment funds and commodities means that we can see that there are a set of clients that were unable to use some of their assets for liquidity on electronic trading platforms.

It’s true that the underlying assets in the commodities market are often used for collateral, but the process is quite archaic, inefficient and costly. Euronext is able to reduce costs in areas such as haircuts by creating electronic warrants.

Beyond the trading platform, how will the other products help tackle liquidity issues?

The inventory management tool will help create new assets through the production of the electronic warrants. Effectively, the assets that were previously difficult to use for financing will become much more accessible once they are represented on the system. This will allow them to be brought into the more standard repo space.

At the same time, introducing new assets to the repo world will over time, we believe, help to reverse market shrinkage. For example, French wheat, which is already utilised heavily for financing, will be introduced into the repo market and thereby create a new channel to liquidity.

Do you foresee any challenges in bringing commodity and funds-based collateral into the traditional financing space?

It’s going to be a long process to get people comfortable with using those assets as collateral outside of their traditional usage. For example, exchange-traded funds are being utilised in limited volumes within financing markets.

Over a period of time, we believe that these assets will be seen as standard financing tools alongside fixed income and equities. There will be a learning curve for market participants, but I believe we will get there.

What will the onboarding process look like?

The onboarding procedure involves minimal documentation and the platform itself will be standalone to start with, meaning no technology lift required.

If in the future our customers show an interest in integrating our platform with their internal systems, we will accommodate that. However, representatives from one of the largest banks we are in talks with said they wouldn’t be able to join if there was any technology work on their side at all. Therefore, we developed a web-based solution with no new hardware requirements.

Finally, once you go live, what connections will you have with other service providers in the market?

Our plan at the end of 2017 is to provide direct links with triparty providers and CCPs. Users will be able to indicate at time of trading how they want to settle and it will be up to the counterparties to arrange settlement.

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