Taking Canada’s repo market and collateral management to the next level

Key Takeaways

• T+1 and Libor transition requires robust repo infrastructure
• A more holistic approach required for collateral management
• New collateral management platform might help plug the gaps

Despite having well-established and functioning financial markets, Canada falls short on the repurchase agreement and collateral front. Progress is being made but further improvements are needed to bolster infrastructure and boost liquidity.

These were the conclusions from the Market Infrastructure Revolution: Navigating Post Trade Challenges and Partnering in Industry Transformation panel at the recent Canadian Securities Lending Association (CASLA) conference in Toronto. A group of industry experts emphasised the need for a more proactive and innovative approach to attract more domestic as well as foreign participants.

The costs of current repo infrastructure

Their thoughts were best summed by Value Exchange CEO Barnaby Nelson, who said the “incredible costs” the industry carries every day to support the current infrastructure in the collateral repo space, from a balance sheet, risk-weighted asset (RWA) and operational cost perspective, was striking.

He stated that it is inconceivable that the management of collateral and repurchase agreements a decade from now will be conducted in the same manner as it is today. Canada is just beginning to embrace the triparty model, which has already seen a significant transformation in the US, Europe and is also growing in APAC. Time is of the essence.

On the same CALSA panel, Maksym Padalko, operations and policy advisor at the Bank of Canada, noted that the country lacks a general collateral market. He also stated that the repo market could be ” more active” and that the usage of Canadian collateral or securities in foreign markets, such as in the US and Europe, could be expanded.

The challenges were first highlighted three years ago at a Bank of Canada workshop on collateral and securities financing. It said that the country’s securities market, including repo, securities lending, derivatives and cash trading, was well developed, comprising sophisticated institutions with strong in-house trade processing and risk management systems. However, they were siloed with no common infrastructure to efficiently and automatically connect different collateral pools, trade types and market participants.

The workshop also found that the collateral landscape was fragmented between bilateral trades, centrally cleared trades, custodians, agent lenders, private sector tri-party systems, payment system, security clearing system and central bank operations. Moreover, unlike most foreign markets, it said that Canada did not have traded and settled general collateral baskets, while settlement and collateral management had too many manual processes.

Automating the end-to-end lifecycle of a repo trade

Industry participants are optimistic about the newly launched Canadian Collateral Management Service (CCMS). The platform is a joint effort between TMX Group, operator of the Toronto Stock Exchange and post-trade infrastructure, including the Canadian Depository for Securities, and Clearstream, the international central securities depository of Germany’s Deutsche Börse.

CCMS aims to facilitate the optimisation and collateralisation of securities finance activities throughout the Canadian financial ecosystem. It intends to help market participants solve legacy technical challenges and operational limitations by automating the end-to-end lifecycle of a repo trade. A higher collateral velocity is seen as more important in the T+1 settlement era, which became effective on 27 May, one day before US markets made the switch from T+2.

The CCMS platform also provides exclusive domestic tri-party repo capabilities to increase liquidity and minimise exposure risk. Triparty was not a well-known concept in Canada but has also become significant due to the shorter settlement cycle as well as transition at the end of June to the Canadian Overnight Repo Rate Average (CORRA) from the legacy, Libor-based Canadian Dollar Offered Rate (CDOR), which was the recognised financial benchmark for bankers’ acceptances (BAs).

The first live tri-party repo transactions on CCMS were done by the country’s five largest banks–BMO, CIBC, RBC, Scotiabank and TD Bank.

Steve Everett, head of post-trade innovation at TMX Group, told Finadium News & Opinion that, ultimately, the platform was going to accelerate behavioural change in Canadian markets because of the substantial efficiency upgrade compared to how traditional bilateral and triparty has worked for domestic participants. He expected it to be a ‘real competitor’ by the end of the year.

Future plans include extending CCMS services to corporate cash tri-party repo for the first time with subsequent expansions into securities lending and the use of equities as collateral later in the year. Further automation capabilities are also expected over the coming months.

However, the global expansion will not happen overnight. Marton Szigeti, head of collateral, lending & liquidity solutions at Clearstream, said it would take several 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, he added, 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.

The bigger picture

The new collateral management platform is part of a larger change in the finance industry, including global regulation on Uncleared Margin Rules (UMR) that has driven more trades through central clearing.

According to the CDCC (the Canadian Derivatives Clearing Corp.), about 35% of the Canadian outstanding repo market is cleared centrally, as compared to about 50% in the UK and Japan. ‘Canada’s cleared repo market has also grown rapidly in recent months. The average daily value of repo transactions cleared by CDCC grew by about 37% between June 2023 and June 2024.’

As market participants in Canada juggle with new rules and services, they must ensure their desks keep pace with the growth and increasing complexity of repo markets. A single solution for repo, securities lending, and collateral trading is the ideal antidote.