Tri-party repo discussions pick up in Asia
There is growing interest among regulators and exchanges in Asia over the introduction of national tri-party collateral platforms to mitigate against counterparty credit risk.
The practice is heavily entrenched in the US, where the market is estimated at $1.8 trillion, with BNY Mellon and JP Morgan the dominant clearing banks.
While these services have not taken off with the same vigour in Asia, discussions among regional central banks and national exchanges over the use of repurchase agreements (repos) as a way for banks, corporates and financial institutions to obtain secured funding have been increasing since the collapse of Lehman Brothers.
The Lehman crash, which happened five years ago next week, highlighted the need for collateral – high-quality, liquid securities such as government bonds or cash – to be used to secure credit risks of counterparties involved in over-the-counter (OTC) trades.
In July, the Australian Securities Exchange (ASX) partnered global central securities depository Clearstream to launch the first phase of ASX Collateral, allowing the Australian central bank, domestic and international banks to post and manage collateral on a centralised platform. One of the aims is to mitigate counterparty credit risk exposures from over-the-counter trades.
ASX’s move follows the Hong Kong Monetary Authority’s launch of a tri-party service in June last year with Euroclear and JP Morgan.
Blair Harrison, senior manager of settlement services for ASX, says its tri-party repo service can be used to “allocate and optimise collateral across repos, securities lending and non-cleared OTC derivatives”. Customers can also use the service to collateralise their margin calls.
Also this July, the ASX’s existing clearing house, ASX Clear (Futures), rolled out a central clearing service for Australian dollar interest-rate swaps, with plans to expand the service to New Zealand dollars and other OTC products.
ASX’s partnership with Clearstream, which has been offering tri-party repo services in Europe since 1992, helped ASX to develop a local collateral infrastructure that connects with the country’s bond securities depository, AustraClear, and the equity securities depository, Chess.
It will eventually allow ASX to handle various aspects of collateral businesses, including repos, securities lending and the moving and posting of margins on listed equity derivatives, as well as OTC margin clearing.
“These transactions all need high-grade collateral,” notes Davin Cheung, regional manager for global securities financing for North Asia at Clearstream. “In Australia, many institutional investors such as supranational funds do a lot of OTC derivatives with banks. Eventually, they need to put these trades onto CCPs [central clearing counterparties] for central clearing.”
ASX Collateral will extend its services to equities collateral by the first half of 2014, although for the moment it is focused on fixed income securities.
ASX says that between Chess and AustraClear the service will potentially mobilise A$2.5 trillion ($2.3 trillion) of assets.
No Australian institutional investors or superannuation funds have yet signed up for the service, Harrison notes, adding that they can receive the service through their custodians or by becoming participants of AustraClear.
According to a September 2012 bulletin published by the Australian central bank, there was around A$240 billion in outstanding commonwealth government securities, representing around 17% of the country’s GDP and 9% of total bank assets.
These numbers suggest that demand for high-quality liquid assets will likely increase much faster than government bonds can be issued.