Joining the dots of the new regulatory framework for a better understanding of the new securities infrastructure landscape

Article

Joining the dots of the new regulatory framework for a better understanding of the new securities infrastructure landscape

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In the wake of the market turmoil of 2008, regulatory measures and market events has been shaping the future European market infrastructure. Among the key aspects of this transformation, we will focus on the market infrastructure and post-trade-related aspects, and factors relating to collateral.

Executive summary

The Financial Collateral Arrangements Directive (FCD) and Settlement Finality Directive (SFD) are two of the regulatory responses to the major increase in crossborder financial flows in a highly fragmented European market. Welcomed by the market, these directives have proven to be a step in the right direction, but there is still room for improvement. The use of collateral has continued to increase, leading the industry to call for an extension to the list of assets eligible for use as collateral with the European Central Bank. On 13 June 2013, the European Central Bank announced greater flexibility in terms of assets accepted as collateral (e.g. asset-backed securities).

Furthermore, the need for High-Quality Liquid Assets (HQLA) for bank liquidity buffers as per the CRD IV definition drove market players to a scramble for the ‘most wanted’ assets (e.g. debt of G20 countries), which resulted in the collateral market drying up due to a lack of definition of HQLA Level 1 (extremely HQLA) and Level 2. We are therefore seeing a profound change in market practices and methods in an environment in which infrastructure is also transforming collateral management in Europe.

The challenge facing the sector mainly consists of achieving proper understanding and implementation of the various regulations, all of which are aimed at improving market efficiency and investor protection, but with a different rationale, objective and timetable in each case, making it difficult to adopt a holistic approach to creating the optimal operating model for the future. Our subject, collateral management, will be impacted by, for example, EMIR, MiFIR, the ESMA guidelines on UCITS and AIFMD.
 

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