The OTC Space | Category Archive | Collateral Management

The 2013 Standard Credit Support Annex | ISDA podcast

June 11, 2013 by Maria Leontiou 2 Comments

The 2013 Standard Credit Support Annex (SCSA) is now published following the ISDA Collateral Steering Committee’s efforts for its development upon the request of the ISDA Board of Directors.

The SCSA, a market-driven initiative with a flexible implementation approach, allows firms to move at the pace they deem appropriate. Market participants have the option of adopting the new SCSA or continuing to use the current CSA. ISDA will support both documents, and expects that a number of market participants will move to the new SCSA over time because of the benefits it offers.

The SCSA retains the operational mechanics of the current CSA but amends the collateral calculation so that derivative exposures and offsetting collateral are grouped into like currencies, or “silos”. The SCSA contemplates the sole use of cash as eligible collateral for variation margin, although securities will still be permitted for initial margin. Each currency silo is evaluated independently to generate a required movement of collateral in the relevant currency. This aligns bilateral collateral structures and economics to be more consistent with margin approaches adopted by global clearing houses.To avoid cross-currency risk, a new net settlement process has been deployed alongside the SCSA, a methodology which enables parties to net various silo collateral flows into a single payment with a single currency. To achieve net settlement, a common set of standardized market rates is required, including overnight interest rates and the Bloomberg-ISDA SCSA rates for FX.

Should you wish to get more details on SCSA, ISDA have published an audio stream / podcast, in which Michael Clarke, co-chair of the ISDA Collateral Steering Committee and Managing Director, Goldman, Sachs & Co., answers questions regarding the SCSA, is available on the ISDA website’s Webcasts & Videos page.

Maria L.

Collateral Management, CSA, IDSA, News

isda, SCSA

Too much choice: The problems with Europe’s plethora of segregation models – Risk.net

May 14, 2013 by Bill Hodgson 2 Comments

Speaking from experience, the number of models and the details underneath them aren’t going to get any easier, especially when the interpretation of the word by word reading of EMIR can lead to considerable ambiguity and flexibility.

Tom has done a good job of illuminating the challenge of solving the legal, operational and commercial challenges of reengineering the underlying fundamentals of CCPs whilst in-flight.

Too much choice: The problems with Europe’s plethora of segregation models – Risk.net. (subs)

Central Counter Party, EMIR, FOA, ISDA, Segregation

DTCC and Euroclear to Launch Joint Collateral Service | Business Wire

May 13, 2013 by Bill Hodgson 0 Comments

Not unexpected but interesting, the DTCC project to automate the full end-to-end lifecycle of margin calls, the Margin Transit Utility, has gathered steam, with Euroclear intending to support the service, and therefore streamline the entire business process for collateral management of OTC (ISDA) margined products.

Press release: DTCC and Euroclear to Launch Joint Collateral Service | Business Wire.

The actual MTU strategy PPT: https://www.euroclear.com/dam/Presentations/2013/Collateral%20Conference/PPT016_DTCC.pdf

Collateral Management, DTCC, Euroclear, News

Isda AGM: Industry to address negative interest rates under CSA – Risk.net

April 27, 2013 by Bill Hodgson 1 Comment

With OIS rates below low, in some cases the interest on your cash posted under a CSA can go negative, i.e. you pay to post. ISDA has been working on a clarification on this, and might issues a protocol. On the other hand it might mean a re-papering exercise for customised CSAs.

Isda AGM: Industry to address negative interest rates under CSA – Risk.net.

Collateral Management, CSA, CSAs, ISDA

Misuse of collateral creates Systemic Risk | FT.com

April 23, 2013 by Mihir Vaidya 4 Comments

A great insight by Satyajit Das at FT.com on the increased Systemic Risk that the misuse of collateral can bring into the financial system, especially non-cash collateral.

The statement may sound as a contradiction to the theoretical belief that the purpose of collateralisation is to mitigate risk and not aggravate the risk. Satyajit Das analyses the impact of the misuse of collateral through the below points:

Shifting of risk: Risk emphasis shifts from the borrower to the creditworthiness of the collateral.
Government Bonds are not risk-free: Although in theoretical calculations, sovereigns are considered as risk-free; in practice, this is not the case.
Liquidity assumptions: Collateralisation assumes a liquid market for the security placed as collateral. This may not always be the case.
Asset Liability mismatch: This is a component that can compound the risk. For example: a loan could be of a shorter maturity than the security pledged.
Operational and Legal risk
Moral Hazard: This is an interesting point. The author opines that although lowering collateral levels reduce protection, pressure to increase business volumes may lead to insufficient collateralisation, increasing leverage.
Systemic effect: Most importantly, collateral alters the dynamics of the financial markets – quantum of credit available, liquidity (practice of rehypothecation), risk and behaviour.

The complete article can be found at the FT here (subs required).

Collateral Management, News, Systemic Risk

cash collateral, collateral, systemic_risk

Omgeo expands ProtoColl | Regulatory Compliance

April 15, 2013 by Maria Leontiou 1 Comment

Post-trade vendor specialist Omgeo has announced the expansion of ProtoColl, its collateral and margin management product, to cater for regulatory measures.

Provisions in both the US Dodd-Frank Act, and the European Market Infrastructure Regulation (EMIR) have introduced central clearing and new eligibility criteria for collateral. ProtoColl allows for asset managers to monitor their margin and collateral requirements across the entire trading landscape, and an automated collateral-selection function which grades the available assets and suggests which to use for specific trades.

Other added functionality includes recognition for the Legal Entity Identifier (LEI) and its precursor, the US Commodity Futures Trading Commission Interim Compliant Identifier (CICI). More details here.

Maria L.

Collateral Management, Dodd Frank, EMIR, LEI, News, Optimisation, Software and Technology

collateral management, collateral requirements, Dodd–Frank Wall Street Reform and Consumer Protection Act, European Market Infrastructure Regulation, market infrastructure, technology

ISDA, IIF, AFME and SIFMA Blast Proposed Margin Rules

April 15, 2013 by Bill Hodgson 1 Comment

A letter from the above four trade associations spells out the consequences on imposing Initial Margin requirements on un-clearable OTC products. The letter was sent to the Chairman of the BIS Stefan Ingves, Mark Carney at BoC, William Dudley at the New York Fed, Greg Medcraft at IOSCO and Paul Tucker Chairman of the CPSS.

Some quotes below:

While we recognize that the proposals for margin requirements are considered to be “near- final,” we still harbor grave concerns regarding the initial margin (IM) requirements. We therefore believe it is important to write to you separately from the responses we provided to the BCBS-IOSCO on the Second Consultative Document. We respectfully ask that you consider withdrawing or suspending any IM requirements until their consequences have been fully analyzed and clarified.

and

As we have noted previously, the outright quantum of margin required even in “normal” market conditions is very significant. Increased IM requirements in stressed conditions will result in greatly increased demand for new funds at the worst possible time for market participants.

The IM requirements could force market participants to forego the use of non-cleared OTC derivatives and either: (1) choose less effective means of hedging, or (2) leave the underlying risks unhedged, or (3) decide not to undertake the underlying economic activity in the first instance due to increased risk that cannot be effectively hedged.

The IM requirements should not be used as a tool to meet objectives of policymakers to reduce risk by encouraging more clearing. No incentive is sufficient to safely clear non- clearable derivatives, and an incentive that seeks to encourage such practices is inconsistent with efforts to create robust and resilient clearinghouses.

I like this point quite a lot:

The second issue has to do with the belief that IM is a necessary and effective measure which will incentivize market participants to clear their OTC transactions. We believe that you cannot incentivize the clearing of something if it is non-clearable.

The PDF can be downloaded directly, Margin Requirements for Non-Cleared Derivatives-4, or via the ISDA website below, look for the April 12th news item.

via ISDA – International Swaps and Derivatives Association, Inc..

AFME, Collateral Management, IIF, Initial Margin, ISDA, News, SIFMA

MF Global Failure and the Benefit of Integrated Collateral Management | 4sight.com

April 5, 2013 by Bill Hodgson 1 Comment

Some interesting analysis on the demise of MF Global:

http://dealbreaker.com/2013/04/mf-global-report-shows-limits-of-the-just-write-all-your-positions-on-post-its-method-of-risk-management/

The article suggests that MF Global had trouble meeting margin calls on its repo to maturity funding for its peripheral Euro sovereign bond portfolio and that:

“Unlike other financial institutions, the Company did not have a collateral management database to guide Treasury and Operations Department staff on which securities could be pledged to satisfy the conditions of the repo financing agreements. It also did not have a system that automatically identified which customer securities could be pledged. Instead, the Company would select collateral manually, enter the CUSIP numbers for the securities directly into the clearing bank’s technology platform, and then learn post-allocation whether the collateral selected was acceptable under the terms of the relevant agreements.”

This highlights the growing importance of having an integrated real time collateral function for collateral management and allocation and got me wondering how many other firms are currently operating in this way, and how many firms rely on manual / spreadsheet solutions to handle the Collateral Management function?

Martin Seagroatt, (http://www.linkedin.com/in/martinseagroatt) http://www.4sight.com/news

4Sight, Collateral Management, CSA, CSAs, English, Repo, Systems, Vendors

IOSCO publishes comments to Feb 15 Consultative Paper on Margin for Un-cleared Derivs

April 3, 2013 by Mihir Vaidya 0 Comments

IOSCO yesterday published the comments received on the second consultative paper for uncleared derivatives on their website. All responses from industry participants are available under ‘View Comments’ here. Michael Beaton from Regulatory Reform has published a summary of some key industry responses here.

There are some very interesting comments, especially from ISDA on the issue of re-hypothecation of collateral, the amount of initial margin proposed under the consultative document and the procyclicality of Initial Margin.

Mihir V.