European Central Bank\u2019s (ECB) Eurosystem Collateral Management System is implemented by 19 national central banks across Europe. This project consolidates Eurosystem market integration and harmonization initiatives, which aim to develop a standard platform and systems that work across Europe.<\/p>\n
Benefits\u202f<\/strong><\/p>\n Who are the participants to interact with ECMS and what are its core functions?<\/strong><\/p>\n Participants who connect and interact with ECMS regarding collateral services are counterparties, triparty agents, and central security depositories; they communicate using two different modes: application to application (A2A) and user to application (U2A).<\/p>\n Below are the key functions of ECMS participants.<\/p>\n Figure 1: ECMS – ECMS Participants connectivity through ESMIG<\/em><\/p>\n Counterparties:<\/strong> Counterparties normally refer to brokers, dealers, investment banks, and other security dealers; this acts as an entity that participates in the payment or security transaction of ECMS. Below are the core functions of counterparties:<\/p>\n Entities that act as counterparties are European Central Counterparty N.V., Eurex Clearing AG, Cassa di Compensazione e Garanzia S.p.A. (CCG), European Commodity Clearing, and ICE Clear Netherlands B.V.<\/p>\n Central security depositories:<\/strong> CSDs are the financial institutions holding securities and take care of complete billing, corporate actions, and asset services.<\/p>\n Firms that operate as CSDs are Euroclear, CEDEL GROUP, Finnish Central Securities Depository Limited, and Deutscher Kassenverein AG.<\/p>\n Triparty Agents:<\/strong>\u202fTriparty Agents offers triparty collateral management services that allow market participants to take advantage of collateral availability through different markets. Some of the core functions are listed below:<\/p>\n Firms that operate as Triparty Agents are Clearstream Bank Luxembourg, Euroclear Bank, Bank of New York Mellon, JP Morgan, and SIS.<\/p>\n Key harmonization activities of the ECMS<\/strong><\/p>\n Below are the harmonization activities that have been identified by the stakeholders; each activity has several business processes and workflows.<\/p>\n Triparty collateral management-<\/strong> Harmonization of collateral management workflows and messaging in-order to facilitate interoperable processes allowing collateral mobility across triparty agents<\/p>\n Corporate actions-<\/strong> Harmonization of corporate actions processes, workflows, and messaging by reinforcing existing standards or adding new harmonization standards<\/p>\n Taxation processes-<\/strong> Taxation processes, in the context of collateral management, account identification of parties in collateralized transactions<\/p>\n Bilateral collateral management-<\/strong> Interoperability and leverage to existing infrastructures and market platforms<\/p>\n Margin calls-<\/strong> A need for harmonization has been identified for the wider use of electronic platforms for margin calls<\/p>\n Billing processes-<\/strong> Holding collateral in different CSDs involves subsequent requirements on the collateral givers and takers in terms of adhering to different CSD processes, reconciliation, and payment of fee invoices (collaterals)<\/p>\n Cut-off times-<\/strong> Mobilization of collaterals between delivery versus payment (DVP) and free of payment (FOP)<\/p>\n Collateral dynamic and static data-<\/strong> Ensures the core collateral data needs to be exchanged in a timely manner.<\/p>\n Sourcing of collateral-<\/strong> Timely sourcing of collateral is fundamental to the efficient functioning of collateral management processes. Time taken to process collateral instructions and further improve settlement processes. The market is also considering encouraging non-T2S CSDs to join T2S, which would aid in the market’s achievement of the level of service.<\/p>\n Non-Euro collateral-<\/strong> Harmonization is required in the sourcing of non-euro-denominated collateral as well as the handling of cash flows resulting from CA events involving non-euro-denominated assets.<\/p>\n Issue and Barriers to effective and efficient collateral management systems\u202f<\/strong><\/p>\n The transition from current disparate manual processes and content to ISO-based standardized messaging and workflows will need elaborate electronic mechanisms and will likely add a significant burden on all financial intermediaries involved, i.e., the CSDs, TPAs, and custodians.<\/p>\n Some of the common issues faced by ECMS participants are:<\/p>\n Migration and Testing Approach- Stakeholders involvement and responsibilities\u202f<\/strong><\/p>\n The ECMS migration process is expected to be aligned with its mandate from the two working groups, the User Testing and Migration Subgroup (UTMSG) and the ECMS Working Group (ECMS-WG). This defines the strategy to smoothen the transition of the current collateral management system to the new ECMS.<\/p>\n NCBs to move all the current collateral management functionalities from existing local collateral management (CMS) systems to new systems.<\/p>\n ECMS migrations will be a big-bang approach, where all respective participants, such as national central banks and their communities (CPTYs, CSDs, and Triparty Agents), will be migrated simultaneously.<\/p>\n Stakeholders\u2019 participation in terms of migrations and testing – below are the entities who are required to perform the extensive testing of the ECMS migration.<\/p>\n Testing Approach- Plan, Phases, and Environments<\/strong><\/p>\n Testing period is planned to have two different stages and will be performed in two testing environments – The Interoperability test<\/strong> environment and Pre-production<\/strong> environment.<\/p>\n Test stages: – 1) Eurosystem Acceptance Testing Stage (EAT) 2) User Testing,<\/p>\n Here are the details of different stages.<\/p>\n\n
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