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Cash as an Asset Class: Risk and
Profitability at the European Collateral
Management System (ECMS)
The European Collateral Management System (ECMS) is a thoughtful way to harmonize
what are currently 20 national central bank processes for collateral and credit management
into one EU-wide system with the European Central Bank (ECB) at the center. In this article
with Murex, we investigate how banks will need to consider their cash as collateral as a new
ECB asset class, the risks and opportunities this offers, and what technology is required for
the new framework.
BY JOSH GALPER, FINADIUM
T
he ECMS project has been Securities, enabling one set of features sector firms had previously delivered, albeit
ongoing for the last five years, for the three ECB liquidity, collateral and in a non-standardized way across the bloc.
building on the idea of European settlement services. Sabine Farhat, head Our conversations suggest that the net
Capital Markets Union (CMU) of securities financing, lending and repo result for Europe will be positive.
to reduce competitive barriers product at Murex, noted that “ECMS will There is a new element of cash
and support the European financial sector. support the European markets through its management that banks will need to solve
As part of CMU, European authorities single view of securities and cash; this breaks for: while previous national central bank
have been working to create European- down product and asset class siloes for the accounting looked at collateral and credit
wide institutions and policies that replace benefit of market participants.” CMS is built lines, ECMS will also look at cash as an asset
a decentralized and costly range of on the Single Collateral Rulebook for Europe class by calculating a credit line available to
infrastructures: these include processes run (SCoRE), which creates standards for triparty each bank counterparty. ECMS will have the
by national central banks, central securities collateral management, corporate actions ability to draw cash from a bank’s account
depositories and central counterparties. and billing, using ISO 20022 messaging. as needed, which will drive efficiency but
The harmonization of operational and The aggregation of European collateral could also cause losses in interest revenue
accounting practices is central to the mission liquidity and settlement systems is expected if not managed proactively. Similar to a
of financial integration across the EU. to be operationally significant by reducing margin account but with no need to request
ECMS works by making the ECB the center costs and creating one messaging format (see a distribution, the credit line becomes a new
of collateral transactions that occur with Exhibit 1). There are no economic studies P&L input for banks using the ECMS service.
any of the zone’s 20 national central banks. that show the full impact across Europe
This will make it easier for all the central yet, but the theory of reducing 20 different Cash as an ECMS asset
banks to assess the credit and collateral national central bank platforms down to ECMS considers cash as one criterion
position of their local counterparties and one should theoretically assist financial in the available credit matrix for banking
reduce the expense of supporting each markets by eliminating duplication. Similar institutions. In a first instance, banks ask for
central bank’s technology and process. ECMS to TARGET2 and TARGET2-Securities, there specified credit lines, then ECMS calculates
will also harmonize the technology and is also an element of competition in that the the daily credit available to each firm and
functionality of TARGET2 and TARGET2- ECB will be operating services that private sends information to a central liquidity
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Exhibit 1:
ECMS will streamline the processing of European settlement instructions
Source: European Central Bank
management (CLM) database. CLM data Exhibit 2:
is received from national central banks; ECMS account structure
this is a new function that consolidates
all of the different national central banks’
funding activities in the market. For market
participants, the credit line looks a lot like
margin loans, however the ECMS credit line
is automatic cash. With margin lending,
banks know they have the credit line and
ask for the cash but this process will be
automatic under ECMS.
There are two places where the ECMS
can access cash: as an internal counterparty
asset and as an external account (see Exhibit
2). Internal assets are accounts opened in
ECMS directly and used to track collateral
positions in a Main Cash Account (MCA).
External accounts are used by the ECMS to
settle positions, provide intraday liquidity
and send payment instructions, although
ECMS does not track the cash balances
of each participant. Cash collateral is
mobilized at 17:00 when non-cash collateral
is unavailable with a debit to the MCA, which
is how monetary policy operations, cash
collateral payments, and corporate action
payments within the ECMS will get settled.
The process is reversed the next business
day (19:00-19:30) so long as other collateral Source: European Central Bank/Bundesbank
is available.
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Exhibit 3:
ECMS flow example
Source: Murex
For both securities and cash accounts, the Executing on Cash Management and cash, credit and debit accounts (see
fact that ECMS will have access means that Under ECMS Exhibit 3). The approved loan is transferred
funding and settlement managers must be The use of technology that tracks, to ECMS from its national central bank
aware of the assets in those accounts at all accounts for and supports the use of cash for the account of Bank A. ECMS verifies
times. ECMS creates a hidden funding risk accounts will be the only way that banks daily that Bank A is meeting its collateral
of being overdrawn or failing to deliver on can take advantage of the opportunities and obligations and sends margin calls as needed
time, which will result in fees from lines protect themselves from the hidden risks of to the central liquidity management tool.
of credit and lost interest on cash. Both ECMS. Cash will be an asset class that must be These margin loans may need to be reported
securities and cash accounts for ECMS use supported in that technology system. Murex to trade repositories under the Securities
can no longer be tabulated by what is left is prepared for this new development with Financing Transaction Regulation (SFTR),
at the end of the day; they must be actively its cross-product and cross-asset platform another area where technology is required
utilized to ensure a positive result. that can already represent the P&L of the and Murex is already enabled to deliver.
Margin loans are still recognized in cash pool; ECMS aligns to Murex’s existing According to Farhat, “Murex’s catalog of all
ECMS although they are a separate account MX.3 offering. As Murex’s Farhat pointed types of financing products can already be
entry recognized as “marginal lending”. out, “Murex’s strength is that we are not used to represent ECMS in the system. This
Marginal lending on request is conducted only a lending solution, a Delta One nor a includes management of triparty accounts,
with immediate settlement while automatic repo solution: we are all of those together. where national central banks can initiate
marginal loans are processed at the end Likewise, fixed income and equity are joining transactions using existing counterparty
of the day in TARGET2. Institutions will forces under ECMS, which Murex already transaction IDs.” This means that ECMS
need to be aware of what is in their cash does. This gives our clients the alignment may use the collateral and avoid freezing
account, which may look like a margin loan already that ECMS is going to deliver.” or claiming cash in some circumstances,
for operational processing, and what the In an example of how ECMS will work, which would mean lost interest in a positive
ECMS calls marginal lending. Bank A requests a loan from the European interest rate environment. Since ECMS
System of Central Banks (ESCB) using Murex will be able to communicate directly with
technology that accounts for securities triparty agents to access cash and collateral,
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individual banks must track and supervise
that activity as well to avoid errors.
The introduction of ECMS represents
a broad new stage of advancement for
European capital markets and will ultimately
be an important way for Europe to achieve
Capital Markets Union. However, there are
intermediate steps that may be uncertain for
market participants as they adapt to the new
technology and the new way of managing
cash and securities as collateral. Farhat notes
that “Starting with a robust technology
platform that already sees collateral the
way that ECMS does – cross-product, cross-
silo and cross-asset class – is the best way to
start out. Murex looks forward to working
with its clients to support their transition
to the ECMS environment.”
This article was commissioned by Murex.
About Murex
Murex provides enterprise-wide, cross-
asset financial technology solutions to
capital markets players. With more than
60,000 daily users in 65 countries, its cross-
function platform, MX.3, supports trading,
treasury, risk and post-trade operations—
enabling clients to better meet regulatory
requirements, manage enterprise-wide
risk and control IT costs. Learn more at
www.murex.com.
