Barclays to Extend Collateral Model

Barclays is offering clients the ability to hold their excess collateral at CME Clearing, rather than a clearing broker, and wants to extend this model to other clearing houses.

The bank said in a statement that it had launched the first enhanced Legal Segregation with Operational Commingling with Excess (‘LSOC with Excess’) model allowing excess collateral to cover variation margin requirements for cleared OTC derivatives.

The scheme allows customer margin to be held in an operationally co-mingled account at CME, although the value of the collateral is identified for each customer and can only be used to cure the shortfall for that customer in the event of a client-led default of a clearing broker.

Peter Borstelmann, North America head of OTC Derivatives clearing at Barclays, told Markets Media: ” The model gives the client the added protection of their excess collateral at the clearing house rather than the broker and also means that Barclays does not have to prefund on their behalf. Over time the ability of clients to leave their excess at the clearer could reduce our buffer by between 30% and 40%.”

Edward Gogol, managing director, clearing architecture at CME Clearing, said in the statement: “This ‘LSOC with Excess’ service is an important improvement in both collateral efficiency and enhanced customer protections. We look forward to partnering with Barclays and buy side clients to develop additional collateral efficiency enhancements in the coming months.”

Barclays is aiming to extend the model to other clearers. “We are working to introduce the model at LCH and have also held high-level discussions with ICE,” said Bortelsmann.

Large asset managers have been most interested in the model according to Bortelsmann. “Interest has peaked since we announced the model but clients are focused on SEFs and year-end before they move over,” he added.