The new Canadian Collateral Management Service (CCMS), which enables domestic tri-party repo capabilities for the first time, has been launched ahead of the country shortening its settlement cycle this month.

TMX Group, which operates Toronto Stock Exchange and post-trade infrastructure including the Canadian Depository for Securities, developed CCMS with Clearstream, the international central securities depository of Germany’s Deutsche Börse. The new platform enables market participants to transact domestic tri-party repos for the first time, with the aim of increasing liquidity.

Steve Everett, head of post trade innovation at TMX Group, told Markets Media that CCMS interoperates with the group’s settlement engine, which is critical in avoiding further fragmentation.

“The way we have designed CCMS brings those two worlds together,” he added. “Through unlimited substitution we have the ability to bring assets back in time for settlement without manual intervention.”

The end-to-end lifecycle of a repo trade is fully automated, which is important as Canada is cutting its settlement cycle from two days after a trade, T+2, to T+1 on 27 May this year, one day before US markets make that transition.

Repos allow one firm to sell a security to another firm with a simultaneous promise to buy the security back at a later date at a specified price, which has the economic effect of a collateralized loan, as they are mainly used to borrow cash using securities as collateral. In a bilateral repo, each counterparty’s custodian bank is responsible for the clearing and settlement of the trade. In contrast, a triparty repo involves a clearing bank who supports both parties in the trade and settles the repo on its books.

Everett said: “The ability to interoperate between custodians means we are able to substitute and settle straight out of the trade accounts and bring automation.”

Technology

The ability to settle collateral from trade accounts means counterparties can keep their existing custody relationships, while being able to benefit from the benefits of CCMS. Everett continued that average collateral reuse processes can take up to nine hops, so recalling assets in time to meet T+1 settlement deadlines can be problematic, as it can take hours, if not days. CCMS automation reduces this top minutes.

“CCMS necessitates behavioural change, because it is so fast, efficient and secure,” added Everett. “It is like a speedboat in a sea of tugboats.”

Marton Szigeti, head of collateral, lending & liquidity solutions at Clearstream, told Markets Media that CCMS is a development of the firm’s triparty collateral management platform that has been running for more than 20 years.

“Our platform is unique because we can do third party collateral management,” said  Szigeti. “We use a data interface where we receive the mirrored account information.”

Szigeti continued that the Clearstream platform had to be fine tuned for the Canadian market, which took about 12 months before it went live this month. Clearstream also worked with some Canadian clients on testing and connectivity for CCMS during the market readiness period.

CCMS has generated interest in other countries. Szigeti said there are some conversations in different parts of the world around how the model works, especially in an environment of accelerating settlement periods.

“Higher collateral velocity is needed to survive in a T+1 environment,” he added.

In addition, banks are increasingly facing balance sheet pressure and market participants want to use their collateral as efficiently as possible to lower their funding costs.

Szigeti said: “Collateral efficiency is a general  theme in the industry on a global basis.”

Increasing participation

The big five Canadian banks – BMO, CIBC, RBC, Scotiabank and TD – have conducted inaugural trades on CCMS. In addition, more than 20 market participants are in the process of being onboard according to Everett.

In addition to T+1, the Canadian market also faces the disappearance of Banker’s Acceptances following the cessation of the Canadian Dollar Offer Rate on 28 June this year, so participants need another funding mechanism.

“We look forward to welcoming corporates in the triparty repo for the first time in Canada, as an alternative to money markets “ said Everett.”We are expanding and democratising type of counterparties in the repo market, as well as the type of assets that can be used.”

Other users could include asset managers, insurance companies and pensions to diversify both cash and collateral providers.

“The vision for CCMS is to facilitate a liquidity hub here in Canada by bringing together cash and collateral providers in one place and giving them a very simple way to transact very complex products,” Everett added.

Everett expects CCMS to have really positive volumes by the fall of this year as more counterparties are added.

Nicholas Chan, head, financial resource management, BMO Capital Markets and co-chair, Canadian Infrastructure and Market Practices Advisory Group (CIMPA), said in a statement: “The development of a tri-party repo service represents an advancement in the evolution of liquidity management in Canada, leveraging technology to optimise efficiency, risk management and collateral eligibility in the Canadian market.”

Only fixed income securities can currently be used as collateral in CCMS, but equities will be added shortly in the next update.

“It is really interesting to add additional exposures,” he added. “We will eventually expand the service into securities lending.”

CCMS first aims to mobilise domestic assets before addressing foreign exposures and assets. Clearstream is an international securities depository and some Canadian institutions also operate in Europe.

Szigeti said it will take a number of years before clients can link collateral in Canada and international securities in Clearstream and automatically move collateral between the two in their collateral management programmes. For example, it will take time to align collateral rules and schedules across markets so that market participants can have a single view of their collateral across different markets, and then optimise appropriately.

CCMS also allows real-time repo simulations and introduces real time repo simulations and introduces Clearstream’s artificial intelligence-based collateral solution, OSCAR (Own Selection Criteria with Automated Reasoning), for the creation of collateral baskets.

“Weeks ago we didn’t even have triparty repo  but all these other features have landed at the  same time,” said Everett. “I call it a quantum leap.”