GFF Podcast

CSD innovation, capital efficiency & balance sheet netting with Clearstream and Eurex

• Season 4 • Episode 3

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This month, we're joined by the SFT European Repo Team of 2024 - Eurex - to discuss the new balance sheet netting and collateral optimisation products developed in partnership with Clearstream. Join Jean-Robert Wilkin (Senior Adviser, Clearstream), Frank Gast (MD, Board Member and Global Head of Sales, - Eurex Repo) and Frank Odendall (Head of SF products and Business Development, Eurex Repo) for an in-depth tour of the new combined Eurex clearing services., These services enable cross-product margining and significant cost reductions for exchange-traded derivatives (ETDs), Repo and OTC interest rate swaps (IRS). Additionally, we discuss approaches for balance sheet netting, collateral optimisation and greater buy-side capital efficiency through new ISA Direct models, - as well as the market infrastructure that enables these advancements.

Speaker 1:

Welcome back to the GFF podcast, and we have a very special show for you this September. Yes, it's September already. Where has the year gone? Well, if you work in global funding and financing, it's probably gone, dealing with more and more waves of regulation. And spare a thought for your UK colleagues, because UK EMEA goes live this month, causing even more disruption for the securities, finance and derivatives industries. Joining me, though, this week we have some very special guests to talk about balance sheet netting and, of course, no show would be complete without the BFF of GFF, mr Christian Rossler, my co-host, and Christian. Balance sheet netting seems to have more acronyms, more regulatory regimes and almost more financial instruments than any other single topic we've covered in the GFF so far. So tell me, balance sheet netting set the scene for our listeners.

Speaker 2:

You remember, that regulation drives many of the banks and financial institutions into directives that those banks have to respect, and the balance sheet of a bank is actually, as everybody should know in our industry, divided into assets and liabilities. So I don't want to sound like a professor, but I think it's good to have a bit of an intro into the balance sheet before we dive with the colleagues into the balance sheet netting topic. Now, the business model of banks is to take deposits on one side, which appear on liability side, of the balance sheet, and to make loans to households and corporates on the other side of the balance sheet, which appear on the asset side. So asset side is then the use of funds, and the liabilities is a source of funding. Now banks take deposits from private people. They also have their own capital and they can borrow money from other banks, and one of the tools to do this is repo. As you remember, the Swiss Army knife allows banks to fund themselves, and then they will make loans and they give credit on the asset side of the balance sheet they appear, make loans and they give credit On the asset side of the balance sheet they appear.

Speaker 2:

Now the risk, by transforming those deposits into loans and credits is called the liquidity risk, which is, if a bank run happens and all the deposits and all the depositors run to the bank and withdraw their money which happened, by the way, also in the global financial crisis then the bank faces a liquidity risk. In order to cater and to mitigate that risk, they have to have high quality liquid assets on the asset side of the balance sheet, and that's a topic we discussed with so many of our colleagues already. These are the government bonds and the supranational bonds to mitigate, again, the liquidity risk. Another risk banks face is the credit risk If the borrowers who borrow the money don't pay the money back.

Speaker 2:

Therefore, the bank has owned capital which can absorb losses, but the more risky assets you have on your balance sheet, the more it uses capital, and unsecured loans need more capital than secured loans, and here again, you are with repo. Repo is actually a secured loan, so it consumes less capital, and unsecured loans need more capital than secured loans, and here again, you are with repo. Repo is actually a secured loan, so it consumes less capital. So these are all these unexpected losses that banks need to take into account, and they require a buffer of capital, and this is the topic of balance sheet netting and we'll discuss that. I'm very happy to have the colleagues from UX repo on the show and also my peer John O'Bair.

Speaker 1:

And there's a great deal of complexity in this, isn't there, Christian? Because you've made it sound very simple? But we are talking about a huge variety of different risk-weighted assets. We're talking about fairly complex accounting procedures and principles that apply across market participants. We're also talking about derivatives, futures credit notes, I mean. All sorts of different financial instruments and concepts seem to come into play and have to be accounted for, and there's margins on different products that are getting charged around. I mean, give us some idea of the level of complexity that we have to get into here. This is one of those topics that everyone seems to know roughly what balance sheet netting is about, but it's teams of people engaged in trying to work this out and quite a lot of corporate strategy involved to optimize your balance sheet. Isn't that right?

Speaker 2:

Yeah, I mean the money that the bank borrows and the money that the bank needs to repay is actually a liability, and this is why it hits the balance sheet and why the bank needs to be actually paying attention, needs to be actually paying attention. Banks have a certain amount of capital, as I explained, that can protect against the borrowers that don't repay the money, but that's why certain limits will kick in and banks can only do a certain amount of lending. This is where, obviously, the central counterparty is built to bring back the money, and this is actually why a central counterparty like Eurex Clearing functions. It's actually a machine that will have different defenses of lines of defenses we call them barriers of defenses and this is strictly built to bring back the money, and so, if you talk about balance sheet netting, you have to have a central counterpart in the middle.

Speaker 1:

And, of course, one last thing you haven't said the word ratio. Yet While we're doing the big picture, we hear a lot about ratios, the different kinds of ratio that are there, stress tests, I mean. This really speaks back to the heart of the whole securities lending transformation post the G20 back in the day after 2008. Tell us about ratios.

Speaker 2:

Well, yeah, if you listen to what I said, I talked about risky assets that need more capital, and you know I gave an example. An unsecured loan needs more capital than a secured loan. So a repo is a secured loan, and so there is this ratio that will actually calculate the risk-weighted asset ratio. But in the end, that's what it comes to when the regulator looks into the balance sheet of the banks.

Speaker 1:

And that's the liquidity coverage ratio as well.

Speaker 2:

on the other side, yeah, for the liquidity risk which I mentioned, you know, because you need to have liquidity in order to avoid a bank run, and so that's, you have to have a coverage of liquidity not only for overnight, but for 30, 60, 90 days. And this then drives us into the other ratio, which is the net stable funding ratio. So banks that rely on overnight fleeting funding are not really resilient. You have to have funds on your balance sheet for 30, 60, 90 days. So this is why we move into the discussion of term lending and term trades, and this all resonates with us and, as you know, with the shows that we've done with the colleagues.

Speaker 1:

Our guests back, all people who've been on the show before over the last few years Frank Gast, of course, frank Oden Dahl, both from Eurex and it's not an EU regulation, you don't have to be called Frank to work there, it's just a coincidence, I assure you and also, of course, jean-robert wilkin, uh senior advisor in biz dev clear stream, who was on the premiere of this season and also on many shows before that. But before we we get to that, I want to start with you, frank gast. You, of course, well known to the listeners. You're on our gff show. You've been on uh several shows in the past. You're the managing director and a member of the management board for Eurex Repo and global head of repo sales.

Speaker 1:

So it seems right I should begin with you, because you've had quite a year, haven't you? I mean, we last had you on the show back in February, live at the GFF. And in those six months that have passed it live at the GFF, and in those six months that have passed, it's all been as Rishi Sunak, the former PM here in the UK, would have said it's all been going gangbusters for you guys Onboarded pension funds, insurance companies, super nationals and central banks, so this makes the entire kind of portfolio of our clients very attractive, that we have a good balance of cash providers and cash takers at the moment and you're in the middle of a whole bunch of roadshows right now across uh the whole of europe and beyond uh, talking about a range of new services and products that you've launched to meet this sort of expanded uh market participant group.

Speaker 1:

You're servicing.

Speaker 3:

I've entered a partnership with vermic, a software provider for collateral optimization. Clearstream already had a partnership with them to push collateral optimization and Eurex has entered this partnership also in Q2. And we are trying to also explain all the benefits of collateral optimization, also in context of European Collateral Management System which goes live in November 2024. So a lot of opportunities, a lot of initiatives. That's why we're also doing those roundtables and by saying this, it's been recognized by the industry also that it's been an important topic for the financial stability. And we've recently been awarded we're very proud of and I'd like to thank all our clients and the team for being awarded as the European repo team of the year by Securities Finance Excellence Awards. It shows like there's interest in our services, there's a lot of dynamic in the market and I'm very proud of our team. I'd like to thank, as I said, all of our clients for this achievement.

Speaker 1:

That is great news. And, in more great news, joining us again is Frank Odendal, who is the head of security, finance products and business development at Eurex. You will remember, frank, no doubt, from Episode 9 of Series 1 back in 2022. And back then, frank, I want you to give us a bit of a sort of whirlwind tour here of what's happened, because back then, the things we thought were going to be big stories for example, tapering QE, of course, post-covid economic recovery was a big deal. Back then, everyone was talking about issues with UMR phase six, potentially reforms for pension and buy-side firms reporting under new rules. There was a huge amount of stuff that the media were getting very excited about that didn't turn out to be big deals in the end and there were probably things that were missed. That did so. No pressure, just see if you can catch us up with the last couple of years in a nice pithy soundbite.

Speaker 4:

Firstly, thanks for having me and to try to allow me to share my thoughts on this. I believe many items in terms of regulation were not as severely impacting the market as initially thought. However, what really transpired over the last 24 months was really that we saw a very radical shift to a real normal economy, new markets, the standard markets, coming back. What I mean with that is you see a very historically enormous and fast return of positive rates and with that surge, not just in the eurozone but also in the Feds and the UK, we saw significant volatility, on one hand, for the bonds that really impacted asset prices, but we also saw this volatility driving margin requirements for CCPs. But we also saw this volatility driving margin requirements for CCPs. And here again, we saw significant volatility in margin requirements across the board, which in one hand, clearly creates stress, higher cost of funding. On the other hand, of course, new opportunities or old opportunities were opening up again which for many, many years were quite dormant. When there's no volatility, funding was stable negative rates in Europe, so this kind of completely changed. And then the other piece which really came into the foray last year in particular was if communication by central banks become a much bigger topic once you are again in a changing interest rate environment and just to pick up two examples which created a very significant bout of short-term volatility. One, of course, was the very famous GILD crisis about that mini budget statement which really created havoc, thankfully not in the European, in the Euro denominated repo market, I have to say, but really in the GILD market, which was very documented, but also in the Eurozone.

Speaker 4:

We had our little mini crisis and this was around the uncertainty for a few days how deposits of financing agencies, government entities, would be remunerated going forward. And I remember very well when we all were at this conference in Luxembourg and all the bankers rushing in and then saying, or rushing out, to be precise, and suddenly epic spreads picking up between GC, france and the rest of the world because everybody was trying to buy those high quality assets, fearing they would get zero return from tomorrow onwards. So that was really significant. And, of course, one thing you alluded to already yourself was the replacement of public sector funding, or subsidized public sector funding through the ECB programs by market-based financing.

Speaker 4:

The tapering of the TRTO drove demand for longer-term repo Definitely Brought into perspective again. What do I do with those assets which are not easily marketable. There was a dramatically increased secularization over the last few months and, yeah, in general it's just cash-driven repo and that was, of course, for many years one of the pillars of Eurex business, the GC pooling product. It really went through the roof again, doubling more in volume over a year and a half okay.

Speaker 1:

So now I want to come back to you, jean-robert. Jean-robert wilkin, of course, uh, you all know him, he's a an old hand at the show now. Uh, you were in the season premiere, uh, talking about collateral optimization and how that's going to be a big theme moving forwards. Uh, and obviously prior to that, you were on the show with, uh, michael carignano from vameg talking about the ecms and how, actually this is a sort of fairly major innovation in the sort of efficiency of the market infrastructure connecting together European central banks within the Eurozone. So we have got, you know, an interesting topic now with balance sheet netting, because it is all about innovation, isn't it? In that market infrastructure space as well, as you know, new processes for market participants. So let's just have a look at this. Clearstream has now enabled the trading of special repos and GC pooling within Clearstream's market infrastructure. That's quite a step, isn't it forwards, when it comes to market participants and the sort of balance sheet netting toolkit? Tell us more about that.

Speaker 5:

Thank you, andrew, and thanks for having me as well to this show. It's always a pleasure to come back here. Yes, you refer to ClearStream enabling. It's not only ClearStream, it's Eurex and ClearStream. To be honest, it's a partnership between the trading platform, the CCP, eurex Clearing and ClearStream to enable clients to try, in view of collateral optimization, to consolidate more settlement in a single location and because collateral optimization is indeed increasingly requested and required by market participants, for the reason that my two colleagues Frank, have already mentioned, we have collateral abundance at the moment.

Speaker 5:

A lot of collateral has come back from central bank accounts due to the end of the long-term financing operations. We have new public debt to be financed as well, as well as less liquid securities, so there is increasing need for participants to be able to finance optimally their inventory being. Whatever is high quality, extremely liquid HQLA can be financed short-term, fine and centrally cleared because it's eligible to CCPs and to your clearing, gc, pooling or actual repo. And what is less liquid is to be financed other way, in OTC repo, in triparty repo, and we have seen the balance of triparty repo uncleared growing as fast and in the same rate than the repo business that Eurex has described earlier on. So those two growths in our overall trip-party balances largely replace what we have seen decreasing in terms of collateral posting to central bank, for example. So in this context, remember in October 22, we had migrated our GC pooling product or common baby I would say between Eurex and Clearstream, where we have centrally cleared tripartite repo on quite highly liquid securities and ECB-eligible collateral, and we have migrated that to a new single infrastructure at Clearstream. So the one Clearstream collateral management tool allowing for all our collateral management operation to be dealt out of a single platform. And that was in preparation for the ECMS, which has to still go live now in November 2024, but which will be a very important objective for the ECB.

Speaker 5:

And this progressive technical migration we have enabled has also allowed us to make together the possibility for market participants to choose, for example, to consolidate a certain number of Euro markets or Eurozone markets in our T2S CSD in Clearstream Frankfurt and allows for a number of different debts to be settled in bilateral repo and in GC pooling and also to be posted to DCB from a single location, from a single T2S CSD, and that settlement from a single account in terms of securities, from a single cash account and against a single counterparty.

Speaker 5:

Eurex clearing, when we talk about central clearing, is enabling large market participants and smaller market participants to benefit from balance sheet netting due to the combination of financing and funding through single balance sheet, repos and GC pooling, for example. So that is a key benefit which did not exist before and that with Eurex clearing we have now enabled, allowing for not only German debt to be settled in the German CSD, as we used to call it, but now we've transformed our mainstream bank in Frankfurt CSD into a European CSD enabling to settle all ECB eligible debt, all Eurozone markets. So, next to Germany, we can settle France, belgian debt, Dutch debt, austrian and soon Italian debt as well sorry and Spanish, and very soon European Union debt as well, as well as Eurobonds and all those different segments of the Eurozone debt which are centrally cleared can be settled out of a single settlement account, and that brings a lot of benefit to market participants.

Speaker 1:

And Frank Odendar, I mean coming back to you on this one from the Eurex side, obviously. Obviously, you know, being head of product, you've been heavily involved in trying to, you know, bring these sorts of initiatives together. Do you think this is just the beginning of the process and actually we will see much more of this sort of centralized, consolidated services, uh, being offered to market participants within the EU? Well, I think personally.

Speaker 4:

We have to see that clearly with European ecosystems has grown organically over many, many years, decades, right. So clearly we have 20 plus CSTs and I think Clearstream decided to proactively engage in this investor CST model to consolidate all types of T2S assets within a single CST right and we, whilst we for many years always have offered as a CCP, choice of settlement with multiple CSTs but we think indeed to your point, when you hear this conversation of T plus one migration in the US this year, t plus one coming in other jurisdictions you would think at least that's our work process here. It will be a lot easier to implement t plus one if you can harmonize settlement, harmonize settlement and here comes the story. We have, of course, the t2s system which launched a few years ago, but it's not a system, it's just a settlement platform. Right, and I think that's very much. It's different still in. It's just a platform and I think it's very much different still in the European Union and the frameworks. There is no harmonized insolvency law.

Speaker 4:

All these things are items which become an issue when there is a crisis. Then there is uncertainty. So I think what we want to address, we want to simplify the mobilization of Collector by leveraging the investment that Clearsim has done so far and building out those T2S capacity abilities and through that allow our members to really simplify the mobilization of assets, cheapen into their liquidity management and reduce settlement risk. Because one thing is clear we have already today, in fact, very much centralized settlement infrastructure for many clients, which is via the two big ICSTs. But there are two issues with that. In one sense, the ICSTs are not linked into the T2S system, the central bank money system supported by the ECB, and of course indeed what I mentioned there is no central bank money. Both these items become more and more an issue when it comes to the liquidity management.

Speaker 4:

So we think this is a sound strategy and we work together on this. And the one item here to align as well when it comes to balance sheet netting. So balance sheet netting means you have a buy and sell in your securities financing business. There are certain conditions and accounting standards that qualify two transactions to benefit for a bank to be able to use balance sheet netting. And the three most important criteria I think we can now deliver to our members, and the first two were always there we are CCP, we are the single counterparty of the buy and sell transactions. Same tenor, that's a choice. Liquidity the client could always manage.

Speaker 4:

But where it becomes very problematic was around the single settlement system.

Speaker 4:

Right, and it's really the emphasis here that it's single CSD, it's a single legal framework. You know, and I think that that's where the true value comes. As alluded to earlier, gc pooling was migrated two years ago into the T2S world at Clears and Banking Frankfurt and by combining it now with that single ISM business, or bilateral business as JR would call it, I think this is really where you can close the circle and really allow holistic management of collateral and cash at a single place and that, to our understanding, fulfills the criteria of balance sheet netting and central bank money, and I think that's the value proposition. By the end of this year, maybe to give one little item on this as well we are migrating the largest repo markets to this new setup, so by the end of this year we should have 95 percent by value of our markets enabled to benefit from the service I've got to come back to frank gas here because, not just as a board member and managing director, but as head of sales, that is music to your ears, I'm guessing.

Speaker 1:

Opening up new trading opportunities, opening up new markets, uh like the isa direct models, uh, giving more access to broker dealers, more access to hedge funds, uh, in giving buy side chance to enhance its capital efficiency, this must be a great opportunity for business development. There must be a lot of demand for this as well, because there's a lot of cash in the system and people need to make it more efficient, and presumably you're here at the right time in the right place with the infrastructure and then the products to meet that need.

Speaker 3:

Indeed, andrew, the demand from buy-side firms in cleared repo at Eurex continues to be very strong. And why is this? To benefit from a broader access to liquidity pools. It's from professional risk management, from operational efficiencies and more attractive levels for cash investments. If you compare it to tripartite and bilateral, very often, if you look at numbers today, between 50 to 70% of Euro-denominated repo is already centrally cleared, mainly for sell-side firms. The buy-side portion of this is a fraction at the moment for Euro-denominated. But if you compare this to the US Euro-denominated buy-side it's 1.4 trillion of centrally cleared volume generated by buy-side firms. You can see the potential we think we have for Euro-denominated buy-side repo is huge, even if you can't compare it one-to-one. There's fragmentation in Europe and Frank mentioned some important elements of the infrastructure and account settings for them to put in place that you can benefit from those efficiencies Frank outlined.

Speaker 3:

So our dealer-to-client market initiatives resulted, as you mentioned before already, andrew, in substantial client growth in 2023.

Speaker 3:

And we continued and we are continuing to onboard new clients now in 2024, mainly pension funds, isa, direct standard model.

Speaker 3:

We have insurance companies and now, with the rate levels, corporates are getting also as another segment of this buy-side target group where we see interest and we are onboarding a new group of big corporates, big cash providers.

Speaker 3:

Another important initiative we have is if there is such a demand out there, why can't we find another access model to allow second or third tier participants entering Cleared Repo, which to some extent also always was the obstacle of do they have enough volume or critical mass to justify investments in cleared repo to become a member? So now, together with Avian Armor Clearing, for example, we developed a new access model by using a clearing member in addition to our ISA direct models to allow smaller buy and sell side firms to onboard by using not only a sponsor but a proper clearing member. So they will not become even a clearing member but have the ability to trade in our market, to have access to liquidity pools. So we are making very good progress with those second and third tier clients and APN Amro has attracted as a joint sales effort a number of smaller firms which are now entering also our onboarding processes. That's a great development and I believe we're also able to expand this model to other regions.

Speaker 1:

That's a little bit like, isn't it the sort of setup with the FICC and the US domestic market where obviously U us treasuries now I have to be centrally cleared. Um, they have a, a similar kind of idea, that is, there are similar trends taking place there that are going to be shaping the markets in europe moving forwards. I mean, christian has told me I can't talk about clearing us treasuries or t plus one anymore because I talked about it at least five times every episode last season. So I'll leave it there. But tell us about the trends with clearing in the us. And you know, you think that that's what we're experiencing here in the eu, and I know, jean-robert, you want to come on on this one as well. But frank first. I mean, what's your view?

Speaker 4:

um. So I mean historically, we think there's a very high likelihood that this is going to happen also in Europe, because all the big infrastructure initiatives over the many, many last decades first were tests that tried, you could argue, in the US and then eventually, one way or the other, were transferred, transpired and moved over into Europe. Now, in the short term, I think clearly the discussion or the mandate drives, of course, innovation, but also forces people to really look into this. I mean, the single-repo clearing in the US is very much, very established already for the buy side 2,500 legal entities clearing, etc. And as this becomes mandatory, of course when it's voluntary you have always a choice to do something else and of course there was always a kind of trade-off between the costs and the benefits. Now, if there's a mandate, it becomes very much a cost discussion and we see a similar thought process now developing.

Speaker 4:

Now if, for argument's sake, we were to implement a European clearing mandate or just, if you want, to bring more clients into clearing in Europe voluntarily, one of the biggest issues we typically face when we talk to our clients is the cost of clearing and the one item which is deemed the most pressing item is always the HEPAT, the margin requirement. Why is that? Because and this is well documented there's been significant controversy around this in the context of US treasury repo activity in bilateral space. Often there are no haircuts outright asked for, so that is very much different from what we know and what is practiced in all clearinghouses around the globe. There's always a margin requirement and bilateral space this is typically not happening, or many times this is a fact as a result of a cross-subsidizing, some cross netting arrangement, but clearly this is not something many regulators want to see, and so I think this is a very point of contention.

Speaker 4:

Now, what we're trying to address here is, on the level of Eurex Clearing as a clearinghouse, to really and this is the biggest single infrastructure project of Eurex Clearing overall is really to improve our margining for securities financing transactions, and the first step we call this the Prisma, moving into Prisma. Prisma is a var-based margin methodology we employ for more than 10 years with derivatives already, so moving the securities financing business into this and then, as a next step and that's, we think, the biggest value added we can give to our lenders to really leverage on what we have today. We are one of the very few cross-asset CCPs in this planet. So we want and that's the next stage on this We'll offer cross-margining between the repo business, the futures business and the interest rates for business.

Speaker 4:

So really, um, you may have seen this also as the home of the euro yield curve, straight strategic approach of eurex, eurex clearing, and that's one of the core item here and we've done first implementation already and the savings just in a pure moving the margin methodology for repo to the new Prisma VAR model. We reduce margin or haircuts, make it easier for many, but we reduce it by on average 50%. So we think this will encourage buy-side and sell-side entities to invest more into clearing, offer the clearing if you're a clearing broker, a bank, to your clients, but also is the netting, the counterparty, risk mitigation and by reducing the cost of margining, I think this will become even more valuable, more attractive to many participants.

Speaker 5:

Yes indeed, and to be fair, if you listen to what we have said my two colleagues here from Eurex and what I've said from the beginning of this podcast it's all about cost reduction to some extent and not delivering too much or too expensive collateral for certain transactions. Air cut reduction by the CCP is also a significant cost reduction for market participants, and clearing membership and balance sheet netting is the reduction of the use of a balance sheet of a bank, which is a very expensive and dear asset. And so what we see at the moment is for banks to try to increase the amount of business they can do in interbank or with customers in terms of funding and financing with the same or even less use of their balance sheet. So that's why centrally cleared product sometimes expensive, frank said. You know.

Speaker 5:

For some first reaction is all clearing is expensive because operationally and financially and fees and so on. But at the end, if you look at the overall benefit, one of the benefits of clearing is for banks specifically is the reduction of balance sheet and the use of balance sheet. So that's a significant benefit which allows to reduce costs. So that's all what we have said is about. For banks which organize their funding and financing activity is really driven by this overall cost reduction.

Speaker 1:

Okay, well, on that front, sadly, we have to start drawing these threads together and we need to do our traditional GFF crystal ball question. And I'm going to throw it out to you, but a special crystal ball this time, because one of the challenges, of course, with cost reduction and optimization is it gets harder and harder. It's a sort of exponential drop off. Uh, because there's less and less to save the more efficient you become. So I want to get your crystal ball prediction about what are going to be the major areas for optimization and cost reduction, looking forwards for the next year or two. And I'm going to start with you, frank Odendal, no pressure, but you've had all the hot seat questions so far, so I'm hitting you with this one.

Speaker 4:

Well, I think there's going to be drive to to consolidate your, your asset holdings. You don't want to have 20 accounts spare with collateral immobilized not not mobilized, but immobilized. So I think clients will look to centralize whenever they can keep in mind. Of course there's always a risk discussion there as well, but I think that is to me one of the the biggest drivers. And with that comes of course then the preparing yourself for the digitalization right. Intraday liquidity management will become more relevant as we move along. The ecb has already decided to do intraday instant payments sorry, instant payments in unlimited size. This will come. So you don't need a digital coin to see the problem. You don't need a coin, meaning I can send billions in a mouse click and that's already decided. So that will require a lot of consolidation efficiency to be able to meet these requirements.

Speaker 4:

And I think that will be will require some significant investment for the banks, but also for the infrastructure providers, to really facilitate this drive.

Speaker 1:

And Jean-Robert coming back to you, what do you think is going to be the main focus for cost reduction In terms of?

Speaker 5:

the near future and all we see things, we are very optimistic for the range we offer altogether at Deutsche Börse Group. So through Eurex Trading, clearing and Clearstream, the reason being as well that keep in mind we are going to a period where central banks are progressively trying to exit the central role they have occupied for the last 10 years and plus, and it's going to be slow and progressive, but we can see trillions of cash and collateral being on central banks' account, trillions of cash and collateral being on central bank's account, and this has to come back to the market and go back to a more, I would say, interbank or dealer-to-client business. So it's all go to the repo business overall. But in terms of the size of what's going to happen progressively, I think there will be a lot of centralization, as Frank said early on. I think for collateral optimization, centralization is key. Also, automation we can see already that a number of institutions which were pleased to do bilateral repos and individual single-izing repo on a day-to-day basis, on overnight basis and so on, are progressively trying to move back to tri-party, as they did in the past in the early 2000 and 2010. And just as a matter of size, because single eyes in repo you trade by clip of 100, 200, 300 tri-party. You can trade that in clips of billions per trade and we can see the increase of those kind of very large trade in terms of funding and financing by some participants in cleared repo and so like GC pooling or unclear. And so the automation brought by the different products and services we offer is a benefit for clients which have to suddenly pull back the 10, 20, 30 billion euro of cash they have left for central bank account for ages and now they have to progressively get used again to refinance that in the market or to fund that in the repo market.

Speaker 5:

So what you said earlier on about the new normal is just the resurrection of an old normal. So for young bankers they don't remember. For the oldest one, like some of us are, it's just back to what it used to be, and I think the centralization referred to by Frank and the automation will be very important. And that's why we are very optimistic about the product set we offer and the new options we have offered, thanks to the T2S platform, for example, which didn't exist 10 years ago or was not effective yet. No, it's a mature product. It allows for all ECB-eligible assets, for example, and 20 euros on markets to be settled in one single CSD, like we are demonstrating it with ECMS, for example, as of November this year. So this new possibility will offer new options, new opportunities for clients to finance in bulk some of the assets they have the more liquid one and the less liquid one in the same infrastructure, from a single central account and therefore allowing for cost reduction thanks to collateral optimization. That's the vision and the way I see it going forward.

Speaker 1:

And then, finally, coming to you, frank Gast, what about from your side on the Eurex desk? I mean, apart from you'll be doing a lot of traveling in the next year, what else do you think is going to be a primary focus for that cost-saving move?

Speaker 3:

Yeah, I think, andrew, what we have seen a lot of trading just entering or re-entering trading strategies which they haven't done for years by looking at the significant move of rate changes and now we see rate cuts again. So those trading strategies had also to be operation rate cuts again. So those trading strategies had also to be operationally implemented again. And we have seen a number of firms need to optimize and implement the correct measures for those trading strategies which haven't been used for a while, as I mentioned. And the cost reduction and collateral optimization I can only agree on Jean-Robert or on what is like is a key element. And of this, one measure we are supporting is a more intensive reuse of collateral. So collateral you receive your reuse for margin coverage of margin collateral. This could even be an unclear for unclear margin rules. This could be for CCP margin or even in ECMS having liquidity and access to a central bank for financing reasons. So access to liquidity by optimizing also your cost base and the collateral usage, I think is of key relevance.

Speaker 3:

And if you bring it in the context of a draw on the ECB framework and the new repo facility we see, originally I think everybody felt like now we need to build trust again in the market. But obviously with those measures ECB are now offering that's coming into effect also end of September it still looks that the sales ad firms, the banking community, have to rebuild the trust in the market that those measurements from the ECB are not needed any longer. So it was kind of to reduce the ECBs and the central bank's footprint in the market. That's the aim to allow private sector to have liquidity in all cornerstones of the market. That's kind of the message. What we currently see is banks need to rebuild that trust, obviously by allowing also then liquidity to all market participants buy and sell side firms.

Speaker 1:

That's fantastic and on that very positive note, I think, and an exciting one too. All that remains from this part of the show is to give a huge thank you and a round of applause to our very special guests this week, who are, in no particular order Frank Gast, the Managing Director, member of the Executive Board and, of course, head of Sales for Eurex Repo. Frank, thanks for joining us.

Speaker 3:

It was a pleasure, andrew, thanks for inviting me again and the fantastic roadshow again from your side, and the series. The TFF podcast has been established now as a phenomenal way of interacting with clients and providing education to the market. So thank you to you and Christian for running the show.

Speaker 1:

Thanks very much. And also, then, a huge thanks to someone who hasn't been on for a couple of years, but I'm sure he will be on again soon. Huge thanks to someone who hasn't been on for a couple of years, but I'm sure he will be on again soon Frank Odendal, who is the head of product development for securities, finance and product there at Eurex. Frank Odendal, thanks very much.

Speaker 4:

Good to see you again.

Speaker 1:

Thank you very much for having me and, of course, a man who needs no introduction. In fact, he's basically on the show almost as much as Christian and myself. Big round of applause for Jean-Robert Wilkin.

Speaker 5:

Thank you very much, andrew and Christian, for organizing this again. I understand I should let a few episodes go, maybe till the next season before I come back, so not to bore your audience at all.

Speaker 5:

Maybe till the next season before I come back, so not to bore your audience at all, but it was very interesting and I was very pleased to share this podcast with my colleagues Frank Gerst and Franco Dundal, because that's topics on which we've been working on for years together and now we have the pleasure to promote and to communicate that to our audience and to our clients. And we have a great feedback already from clients and future users and that's really a pleasure to come to the fruition of work that we have done for many years in building this joint infrastructure.

Speaker 1:

That's good. Well, I'll be checking in with all three of you at the GFF Summit Live for our special Summit show in January, so do stay tuned for that, because you know they will definitely be back on then. Okay, and don't forget to join us, of course, on our LinkedIn page that is linkedincom slash company, slash Clearstream, where you can find out all about what's going on, not just here on the GFF podcast and networking with our guests Frank Gass, frank Odendal and, of course, john Robert Wilkin and Christian and myself, but you can find out all about D7 tokenization balance sheet netting, all the latest cross-margining products that are coming out from our colleagues at Eurex. Yes, it's all happening on LinkedIn and in the meantime, don't forget to like the show, subscribe to the podcast so you never miss an episode, and join us next month for more global funding and financing with me, andrew Keith Walker and my co host, Mr Christian Rossler.

Speaker 2:

Goodbye and see you next time.

Speaker 1:

And remember. This podcast is brought to you by Clearstream Banking, one of the main sponsors of the GFF Summit every year in Luxembourg, and features members of the Clearstream team and special guests expressing their personal opinions and not the opinions of Clearstream as an organization. There's no representation made as to the accuracy or completeness of information in this podcast, nor should it be taken as legal, tax or other professional advice. See you next month.