Eurex Hooks Up With Pirum for Central Clearing for Sec Lending Deals
As a prelude to the launch of its central counterparty service for securities lending and borrowing transactions, Eurex has teamed up with securities finance automation firm Pirum.
The new central counterparty service was set to go live in November 2011 for securities lending transactions reliant on cash as collateral. However, it will be delayed until the summer to incorporate securities as collateral as well as triparty collateral management services.
By acting as a central counterparty, Eurex subsidiary Eurex Clearing will reduce counterparty risk exposures and eliminate the need for multiple credit evaluations, thereby lowering capital allocations.
"Pirum will provide its existing real time capabilities to reconcile transactions between securities lenders and borrowers and transmit those transactions to Eurex Clearing for novation. Eurex Clearing will perform all loan lifecycle events such as re-rates, mark to market of collateral, corporate actions processing and calculation of lending fees," says Heiner Seidel, a spokesman for Eurex. "Pirum will make additional reporting of all central clearing activities back to each of the bilateral participants." The deals will often have been completed "bilaterally" -- either over the phone, through emails or Bloomberg terminals.
Eurex's affiliation with Pirum could give the central counterparty service some critical mass to start off. With 100 lenders -- beneficial owners of assets -- custodian bank lending agents and borrowers using its service, Pirum is considered one of the largest post-trade service provides in securities finance.
The securities lending and borrowing market has trailed the equities and bond trading markets in embracing the use of central counterparty services and there has been one noticeable failure to date -- SecFinex, which used on LCH.Clearnet and SIX x-clear for central counterparty services shut down last year after it didn't win sufficient traction.
However, Pirum officials are quick to point out that Eurex uses a different business model. "Unlike SecFinex where fund managers and custodian banks had to rely on general clearing members to clear trades, adding an additional layer of cost,they can be direct members of Eurex Clearing and rely entirely on collateral posted by borrowers," says Jonathan Lombardo, who joined Pirum as director of global sales in January. He previously held that role at SecFinex.
The collateral posted by the borrowers will be segregated by Eurex Clearing at the level of the firm holding what Eurex calls a "specific lender license." That designation allows beneficial owners of securities to participate as clearing members without any margin obligations.
Written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com)