LONDON May 13 Two of the world's biggest market infrastructure companies are joining forces to help banks track down enough cash to underpin their derivatives trades, spurred by new regulation that aims to make safe a traditionally risky area of business.
Brussels-based Euroclear and the Depository Trust & Clearing Corp (DTCC) of New York have agreed to build a new platform to combine available collateral into a single pool.
"It's too early to say when the launch will be. We are scoping it in detail," said Saheed Awan, head of global collateral services at Euroclear.
The derivatives market lay at the heart of the 2007-09 financial crisis, creating uncertainty when large users like Lehman Brothers bank and insurer AIG got into trouble.
New rules are being phased in this year seeking to safeguard the $640 trillion market for financial derivatives like interest rate and credit default swaps.
As a result banks will have to find more collateral, such as cash and government bonds, to set against a wider range of trades in case of default.
The Euroclear/DTCC venture will give European and U.S. investment banks a near real-time view of how much collateral they can call on quickly.
"The savings being forecast by some of the investment banks are in the tens of millions of dollars in efficiency costs in having one pool of collateral," Awan said.
The demand for posting collateral, also known as margining, is forecast to rise sharply because of the tougher rules, which have triggered industry warnings of a "collateral crunch" of anything between $800 billion and $10 trillion.
Awan said he expected banks and other settlement systems providers to plug into the new joint venture, enabling it to be run as an industry cooperative.
Euroclear is already linking up with Asian partners in South Korea and Hong Kong to provide collateral, Awan said, and the joint platform with DTCC would extend that project.
Euroclear and DTCC are also setting up an electronic messaging service, allowing banks to send information about margin requirements at the blink of an eye rather than the slower system of emails and faxes. It will rolled out from the first quarter of next year.
Euroclear holds about 23 trillion euros in assets for clients, while DTCC provides custody and asset servicing for issues worth $37.2 trillion.