EMIR Segregation Models | FIA Magazine

The FIA Magazine has an article about the EMIR seg models (see link below, free), and summarises them here, I have my own views below on the hierarchy of models,
June 28, 2013 - Editor
Category: Clearing

The FIA Magazine has an article about the EMIR seg models (see link below, free), and summarises them here, I have my own views below on the hierarchy of models, but here's their summary:

  1. The basic segregation model is the omnibus net account, where positions and collateral are co-mingled at the clearing member and margins are calculated and transferred net. However clients will still face mutual client risk.
  2. Another omnibus format is the omnibus gross account where the main difference is the gross calculation of margin but with positions and collateral being co-mingled. There is no segregation of excess margin in favour of the CCP although some portability is possible.
  3. A similar model to the “legally separate but operationally commingled” model used in the U.S. is an omnibus gross account with excess margin lodged at the CCP. Almost by definition this requires client positions and their collateral to be maintained individually with clearing members providing information via a report to the CCP that identifies the positions and collateral value attributable to each client. There is portability and the level of protection is limited to the positions and value of a client’s assets as specified by the clearing member.
  4. The fourth level of EMIR segregation provisions is the individually segregated account at the clearing member. The key difference here is the total segregation of client assets from both the clearing member and all other clients. Clearly this requires a very high level of individual account management, not only with clearing member clients but replicated upwards from the clearing member to the CCP.
  5. Finally, a fifth option is the full asset segregation model with the client clearing directly with the CCP. Here the key differentiators involve the full segregation and protection of client collateral assets with margin obligations being settled directly by the client. This is not a format currently specified under Dodd-Frank.

My own view is this:

1. Individual Seg is the top of the pile, it is intended to provide the highest level of protection

  • Your trades and positions are held in a single segregated position account
  • Your IM is calculated on your trades only
  • Your collateral from a book-keeping perspective is held apart from anyone else's assets
  • There is debate about what level of book-keeping and holding of assets is sufficient to meet EMIR, would LSOC work in Europe?
  • There is also complexity caused by Transformation – is the asset at the CCP really the asset provided by the Client?  Or in fact is it whatever the Clearing Member chose to provide to cover the Client IM requirement?
  • If a Client provides ineligible bonds, and the CM delivers Cash to the CCP – what does it really mean to segregate the Client assets?
  • Has an CM got a 'pass through' model? Where the exact Client assets are delivered to the CCP (assuming they are eligible)

2. Omnibus Gross comes next

  • Trades: same as an ISA, your own position account
  • IM: same as an ISA, your IM belongs to you only
  • Collateral: part of a pool with other participants in the account

3. Omnibus Net (multiple PA)

  • Trades: You still have your own position account
  • IM: Net across all PAs
  • Collateral: part of a pool with other participants in the account

4. Omnibus Net (single PA)

  • Trades: One position account only – typically used for Clients of a futures clearing broker
  • IM: single net amount
  • Collateral: Pool

5. Finally, layered underneath any of those accounts, but especially an ISA is 'custody segregation'

  • Collateral held in your own custody account, rather than that of the CCP

6. And not forgetting Excess

  • EMIR requires an excess for an ISA to be held at the CCP
  • EMIR is silent on how excess is treated for an Omnibus account

7. Plus jurisdiction effects of national bankruptcy law

Hence the reason there are many detailed permutations of account models, but only really 3 basic types (Individual, Omnibus Gross and Omnibus Net).

via FI Magazine.


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