Collateral Damage As Firms Forced To Revamp

Terry Flanagan

Exchanges and clearing houses are offering up a smorgasbord of collateral management products and services, as firms seek to maximize the efficiency of operating capital.

Firms are awaiting the anticipated impact of new regulations, and the resulting revamp of operations and increase in IT spend.

According to a survey conducted by Omgeo, a provider of post-trade services, 92% of firms surveyed said they will make operational changes in the next year to 18 months, with collateral and margin management, execution and clearing of OTC derivatives, and overall trade processing both cited by 13.5% as the focus of operational spend.

“In the collateral space, participants will need to better manage their collateral pools across their cleared and bilateral transactions in addition to their repo and sec finance transactions,” Ted Leveroni, executive director of derivatives strategy at Omgeo, told Markets Media. “Robust collateral inventory management and reporting tools will become essential.”

Exchanges are building out portfolio margining for derivatives, enabling clearing members to net their positions across a spectrum of listed and over-the-counter products.

LCH.Clearnet and New York Portfolio Clearing (NYPC) have agreed to explore expanding their existing combined one-pot cross-margining arrangement to include interest rate swaps cleared by LCH.Clearnet.

The goal is to deliver greater capital efficiency to market participants by combining NYSE Liffe’s U.S.-traded interest rate futures contracts already cleared by NYPC, fixed income cash and repo trades cleared by Fixed Income Clearing Corporation (FICC) and interest rate swaps cleared by LCH.Clearnet’s SwapClear service into a single portfolio for purposes of margin netting and offsetting.

“The parties have been working together for many months and have had excellent initial results on the project, and the working relationship itself,” Murray Pozmanter, interim chief executive of NYPC, told Markets Media.

“However, we are still in the exploratory stages of this collaboration so it would be premature to provide any specific details on the business relationship at this time.

“The mechanism for the one-pot margining of interest rate swaps will build off the current methodology already used for cash and futures. By adding interest rate swaps to the same methodology, we believe the service will provide market participants with even greater capital efficiencies and risk-based offsets on a portfolio basis.”

Separately, CME Group has announced that from May 7, it will offer portfolio margining of over-the-counter interest rate swap positions and eurodollar and Treasury futures for house accounts.

NYPC, a joint venture between Depository Trust & Clearing Corp. (DTCC) and NYSE Euronext, has launched Portfolio Risk Interactive Margin Estimator (Prime), a value-at-risk calculator that estimates the “one-pot” margin savings clearing members can achieve.

Previously, NYPC calculated margins for members based upon cleared portfolios of interest rate futures cleared through NYPC and certain cash and repo positions cleared at the FICC subsidiary of DTCC.

Portfolio margining, which is a general term that includes such methods as single- or one-pot margining, enables clearing members to offset positions in multiple asset classes for the purpose of calculating risk, and is very much in the spirit of the Dodd-Frank Act, which seeks to promote greater transparency into the commodities markets.

NYPC allows for one-pot margining of eligible interest rate futures positions cleared by NYPC with U.S. Treasury and agency securities and repurchase agreements cleared by FICC.

Using NYPC Prime, heads of trading desks, traders themselves and product controllers can enter portfolios, whether real or hypothetical, and see the significant margin reductions that are possible when clearing with NYPC on demand.

NYPC is proposing to expand the one-pot margining program to include positions held by NYPC clearing members for “market professionals”, defined as an entity that is a member of a designated contract market and that actively trades for its own account products that are eligible under the cross-margining agreement between NYPC and FICC.

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