By Terry Flanagan

Asset Managers Seek Collateral Protection

Full segregation for assets posted to CCPs is preferred.

Institutional investors are clamoring for the ability to hold their collateral posted for clearing OTC transactions separate from those of other market participants.

“CCPs will make facilities available for each member to hold its client positions and assets, including collateral, completely segregated from its house or proprietary positions,” Helene Virello, head of collateral management and OTC valuation at BNP Paribas Securities Services, told Markets Media.

The level of protection that institutional investors are seeking out can be split into three parts: initial margin, excess margin, and a buffer.

In the case of initial margin, “CCPs should allow segregation, asset protection and portability to other clearers of the client’s collateral and positions, in the event of a clearing member default,” said Virello.

Excess margin is the eventual amount of margin that a clearer will require in addition to what the CCP requires. “Here, the risk borne on the collateral is linked to the clearer itself, unless the assets are held in a specific custody structure,” said Virello.

For both initial and excess margin, clients will require assets to be safe kept and segregated from the clearer and its other clients’ assets.

The third part consists of a buffer put in place to provide operational facilitation.

“This avoids the need for daily movements of collateral between client and clearer,” said Virello. “Like excess margin, the protection of those assets is linked directly to the credit quality of the clearer.”

The CFTC has proposed that each FCM and derivatives clearing organization be required to segregate the cleared swaps of each individual customer and relevant collateral, while permitting FCMs and DCOs to operationally commingle all relevant collateral in one account, known as the legally-separate and operationally-commingled (LSOC) model.

Likewise, European Market Infrastructure Regulation (EMIR) requires clearing members to offer full segregation to their clients.

Derivatives clearing organizations (DCOs) are implementing a new clearing model that is seen as being in conformance with regulatory reforms on both sides of the Atlantic.

Eurex Clearing’s Individual Clearing model enables full legal and operational segregation of all assets (for its non-clearing members (clients with trading admission) at the clearing house level.

The new model allows for collateral and positions to be transferred immediately in the event of a clearing member default, thus clients are protected and enabled to continue their trading activities.

The service is the first segregation solution offered by a clearing house, and Eurex Clearing is the first CCP globally to offer full legal and operational segregation across all cleared markets, the company said.

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