Euroclear Collateral Service Agreement Operating Procedures: Key Things You Should Know
For businesses operating in the financial sector, the management of collateral is an essential aspect of their daily operations. Collateral assets are required to support various financial transactions, such as securities lending, repo, and derivate trading, among others. Euroclear, a Belgium-based financial services company, offers Collateral Highway services, which enable participants to optimize the use of their collateral assets more efficiently. This article focuses on Euroclear`s Collateral Service Agreement Operating Procedures, which are key to understanding how to use the Collateral Highway service efficiently.
What is Euroclear`s Collateral Highway Service?
Euroclear`s Collateral Highway Service is a system that allows financial market participants to mobilize their collateral assets more efficiently and at lower costs. The service facilitates collateral transfers between counterparties and enables users to pool their collateral assets. Euroclear`s Collateral Highway services offer access to a broad range of collateral types, including cash, government bonds, corporate bonds, equities, and ETFs.
Collateral Highway Service Agreement Operating Procedures
To use Euroclear`s Collateral Highway services, participants must sign a Collateral Service Agreement (CSA) with Euroclear. The CSA outlines the terms and conditions under which the parties can exchange collateral assets. It also specifies the procedures for submitting, approving, and managing collateral assets.
Here are the key things you should know about Euroclear`s Collateral Service Agreement Operating Procedures:
1. Collateral Asset Eligibility and Valuation
Euroclear`s Collateral Highway service accepts a wide range of collateral assets. The eligibility criteria for collateral assets depend on the type of transaction, the counterparty`s creditworthiness, and the targeted leverage ratio. Collateral assets are also subject to valuation rules, which determine the haircut and the marking-to-market requirements.
2. Collateral Management
To ensure that collateral assets are managed efficiently, Euroclear requires participants to use a Collateral Management System (CMS) that is compatible with its infrastructure. CMS is software that enables users to manage their collateral assets in a centralized manner, automate processes, and receive real-time reporting. Participants must also provide comprehensive collateral asset data, including the asset type, the issuer, the maturity date, and the ISIN code.
3. Collateral Rehypothecation
Collateral rehypothecation refers to the practice of using the same collateral asset to secure multiple transactions. Euroclear`s Collateral Highway service allows for collateral rehypothecation, subject to specific conditions. Rehypothecation can occur either with full substitution or partial substitution. Full substitution means that the receiving counterparty can replace the original collateral asset entirely, while partial substitution means that the receiving counterparty can only use part of the original collateral asset.
4. Collateral Segregation
Collateral segregation means that collateral assets pledged by a participant are separated from its other assets and held in a segregated account. Euroclear`s Collateral Highway Service offers two types of segregation: Legal Segregation and Operational Segregation. Legal segregation means that the collateral asset is legally separated from the receiver`s assets and can only be used to cover obligations related to the relevant transaction. Operational segregation means that the collateral asset is held in a separate account but can be used to cover different transactions, subject to a set of rules.
In conclusion, Euroclear`s Collateral Highway service is a valuable tool for financial market participants to optimize their collateral management workflows. Participants should bear in mind the procedures outlined in the Collateral Service Agreement, which include collateral asset eligibility, valuation, management, rehypothecation, and segregation. By following these procedures, participants can benefit from lower collateral costs, improved collateral optimization, and enhanced risk management.