GFF Summit, January 2017
Deutsche Börse Group welcomed over 800 delegates to its annual Global Funding & Financing Summit held in Luxembourg last week to discuss the latest developments in the international secured funding and securities financing markets.
Representatives from banking, fund management, capital market infrastructure providers, policymakers and technology providers were able to hear from experts on topics such as OTC derivatives, securities lending, repo, central counterparty clearing, asset management, collateral management, T2S and central securities depositories as well as the evolving role of fintech.
Philippe Seyll, Co-CEO of Clearstream Banking, opened the Summit describing how over the last 20 years, Clearstream's GSF Summit has evolved into a key global event for the securities industry and was now pleased to present the conference in an enhanced and integrated format to reflect the ongoing alignment of Deutsche Börse Group's Global Funding and Financing (GFF) activities. Seyll outlined the key roles undertaken by its Clearstream, Eurex Clearing and Eurex Repo entities and further remarked how new technology developments and product innovation are helping to transform GFF into a one-stop shop for its clients within the new regulatory framework.
The two-day Summit was chaired by Greg Markouizos, Global Head of Fixed Income, Finance and Collateral Management at Citigroup, who's many years of experience of the financial markets qualified him to present and combine all of the multiple elements of the global funding and financing world. In his opening remarks, Markouizos described how markets participants have professionally reacted to the comprehensive changes that have influenced the market over the past ten years and how the securities finance market is the best-placed mechanism for the movement of collateral that is now a crucial component of the implemented regulatory directives. Markouizos further outlined the crucial role of infrastructure and technical developments can bring to enable the mobilisation of collateral, the standardisation of trading and settlement in order to ensure that the key component of the securities finance market – collateral, is able to sustain liquid and capital efficient markets.
Dr. Andreas Zubrod, Member of the Executive Board of Union Asset Management, who described the key developments and major challenges in asset management within the background of the current and future monetary and fiscal environment, gave the first day's keynote speech. Zubrod explained the growth of asset management and how a shift in traditional roles has effected the industry and how the advancement of automated trading, digitalisation and regulation will influence the industry in the coming years.
The Summit's first panel included expert practitioners who were able to define the recent developments in the OTC derivatives markets since the implantation of the first phases of the EMIR regulations. The view from the panellists was that the need for enhanced solutions for clearing and electronic trading as well as the introduction of new technologies such as cloud and blockchain, would enable market participants to continue and enhance their roles in the marketplace. The demand for standardisation and electrification of collateral eligibility and margin calls combined with ease of connectivity was voiced as the main characteristics of the modern-day OTC market. The increasingly important role of the buy-side was emphasised, and how new simplified legal documentation & dispute resolution, technology and clearing services on a global-wide basis are essential to the functioning of a safe and efficient market.
The keenly anticipated panel on the changing face of financing brought together leading representatives from the securities lending world. Moderated by the International Securities Lending Association's CEO, Andy Dyson, the panellists explored how traditional routes to market are being restructured in light of recent regulation and the need for more capital efficient transaction flows. In a poll presented to the delegates, a majority voted that alternative structures are being implemented as a means to enhance their business. Panellists concluded that the role of a Central Counterparty (CCP) as well as enhanced legal and trading arrangements were all key components of the alternative structure under review. Agent Lender and buy-side representatives alike agreed that clients are keen to participate in CCPs alongside the inter-dealer banks that utilise CCPs to manage their resources more efficiently from a credit and risk intermediation, capital requirement and ratio perspective.
The role of the European Central Bank was described, which collects important Repo reporting data, and is able to assess and monitor market conditions. Recent reporting period-ends indicate increased pressure on liquidity, resulting in the requirement for securities from the various asset purchase programmes to be released into the market by the Eurozone's individual central banks and their respective securities lending programmes.
Deutsche Börse Group's Marcel Naas, Global Head of Funding & Financing, introduced the product suite of GFF and the business and market demands driving the GFF initiative forward. Naas highlighted the four main streams as securities lending, buy-side financing, buy-side funding and collateral efficiency. Naas explained how GFF makes it more efficient for clients to manage collateral and access liquidity.
The increasingly important role of new technologies and solutions to the financial world was deliberated, is the fintech world a ''disruptive disintermediation'' or is collaboration a more precise description of current developments. Representatives from four fintech companies providing services for funding and financing activities joined Ankur Kamalia, Deutsche Börse Group's Head of Group Venture Portfolio Management and Ashwin Kumar, Head of Group Business and Product Development. All panellists and delegates contended that new cutting-edge technologies have a unique opportunity to hasten product innovation that results in more efficient and cost effective activities and how cloud and blockchain technology can bring optimisation to the movement of collateral, securities and payments. Kumar described how Deutsche Börse is building an entire blockchain eco-system around its new distributed ledger technologies.
Jeffrey Tessler, Member of the Executive Board of Deutsche Börse Group, responsible for Clients, Products & Core Markets division greeted delegates for day two of the Summit. Tessler shared his unique insight of the global economy and geo-political events that are shaping the world's financial markets and noted how resilient Deutsche Börse Group has been throughout the recent global market turbulence. Tessler further remarked on how the regulatory has evolved and commented that good regulation brings certainty, protection and stability and reduces risk.
The key theme of opportunities in funding and financing markets was emphasised in a segment highlighting the introduction of TARGET2-Securities. Experts discussed how Clearstream as a market infrastructure provider and market participants could benefit from harmonised collateral management and securities lending services for both CSD and ICSD customers once Clearstream joins TARGET2 –Securities in February. It was described how full triparty interoperability will be achieved across Clearstream's CSD and ICSD; resulting in a single system that enables clients to pool collateral across Clearstream, thereby optimising collateral use across locations and facilitating liquidity management.
For the remainder of the Summit, the focus turned to the functions of the repo and collateral market. Godfried De Vidts, Chairman of the International Capital Market Association's European Repo & Collateral Council, lead a group of market practitioners in a discussion on the current and future impact of regulation on secured markets. All panellists described crucial topics such as liquidity pressure, increased demand for high quality liquid collateral, the role of the buy-side, emergence of equity and synthetic solutions, the scarcity of balance sheet and complexity of efficient capital allocation all combined with central banks' monetary policy in how participants in repo and collateral transactions are adapting to market conditions.
In the Summit's closing keynote speech “Ructions in the repo market – monetary easing or regulatory squeezing?'' Yves Mersch, Member of the Executive Board of the European Central Bank outlined the importance of the ECB mandate to deliver price stability. Mersch described how the situation in the repo market today reflects a confluence of longer-term trends that have affected both the supply and demand for good collateral. The ECB's aim is to act in a way that is necessary, proportionate and that limits side effects and have designed programmes in such a way as to deliver that objective without creating excessive distortions in market functioning and price discovery. Furthermore, the reasoning why the ECB has taken measures to mitigate some effects on repo markets. These measures, too, are governed by the principle that they must be necessary and proportionate, as well as not being in conflict with the price stability mandate.
On CCPs. Mersch stated that the leverage ratio contains provisions for netting of offsetting cash positions when they are with the same counterparty and settled through the same system. This has resulted in a much greater use of CCPs, which is strongly supported by authorities and brings benefits in terms of smooth market functioning. Mersch concluded by stating that banks and other market participants report a decrease in market making activities and collateral scarcity in repo-markets. The perception of a challenging environment can therefore not be denied. Pro-cyclical market reactions during and after the financial crisis and – related – changes in banking regulation clearly had an impact on the functioning of the repo markets. However, with the continued economic recovery, market stress should fade and conditions for unsecured lending might re-gain some attractiveness. Likewise, market players will adjust their business models over time amid a new regulatory environment
Greg Markouizos in a closing statement, returned to thank moderators, panellists and delegates for all their input and valuable contribution to make a successful Summit. Markouizos underlined the central role of the global funding & financing market, and recounted the key themes such as mobility, capital, liquidity and balance sheet combined with the important role of technology and market infrastructure that were all highlighted by market participants gathered at the GFF Summit over the two previous days. Markouizos closed by stating that all those present can help create a market that is fit for purpose, and build on the fact that we all have a responsibility and a mission to build a market that is critical to all our countries' well-being in a systemic responsible and sustainable manner.