Exchanges Expand Portfolio Margining
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 mechanism for the one-pot margining of interest rate swaps will build off the current methodology already used for cash and futures,” Murray Pozmanter, interim chief executive of NYPC, told Markets Media. “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 OTC 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 (VaR) calculator that estimates the “one-pot” margin savings clearing members can achieve.
“PRIME enables our clearing members and potential members to estimate the margin savings achievable across portfolios of cash and interest rate futures when using NYPC’s one-pot methodology,” Ira Krulik, chief operating officer at NYPC, told Markets Media.
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.
PRIME enables users to perform scenario analysis to observe the margin impact of altering a position, portfolio or market strategy, as well as drill down beyond the desk level to view each trader’s portfolio to get a sense of their implicit margin requirements, Krulik said.
PRIME is based on a mix of proprietary technology developed by NYPC’s in-house development team, with certain licensed components, Krulik added.
FFastFill, a provider of software services for derivatives, will deliver the VaR calculator that estimates one-pot margin savings that clearing members can achieve for proprietary interest rate futures cleared at NYPC.
“NYPC is a new customer,” Ryan McElvogue, managing director at FFastFill (U.S.), told Markets Media. “FFastFill currently provides software-as-a-service [SaaS] solutions to NYSE Liffe U.S., which made the introduction to NYPC for the NYPC PRIME project.”
FFastFill will also deliver certain cash positions cleared at FICC as a SaaS solution from its global network of managed data centers.
FFastFill provides various services and software to other exchanges and clearing service providers. “This includes both bespoke development and managed service solutions,” said McElvogue.
Phase 5 of the uncleared margin rules (UMR) took effect from September 2021.
Temporary equivalence is set to expire on June 30 2022.
IRS trading volumes have fragmented without an equivalence agreement.
Phase 5 of the uncleared margin rules came into effect on 1 September.
Triparty repos can be executed across U.S. Treasury securities to central clearing.