Collateral management one of the more problematic issues posed by customer-to-dealer OTC clearing.
Banks are knee-deep in preparing for a surge in cleared OTC swaps transactions, triggered by regulatory reforms such as the Dodd-Frank Act and European Market infrastructure Regulation (EMIR).
They have already taken steps to clear large percentages of their customer-to-dealer transactions, which historically been cleared bilaterally, such as becoming clearing members of derivatives clearing organizations.
Much work remains to be done, however.
“Client clearing has been much more complicated to implement,” Mariam Rafi, head of OTC clearing, Americas, at Citigroup, told Markets Media. “The legal constructs are much more difficult, and getting segregation models, customer documentation, and portability right has not been an easy job.”
In concert with the growth and complexity of the derivatives collateral management process, major banks are providing clients real-time windows into reviewing and approving their collateral agreements, margin calls and settlements.
BNY Mellon, for example, has enhanced its derivatives collateral servicing platform for institutional clients with new margin management capabilities delivered through a secure web-based portal.
As part of DM Edge, the company’s derivatives margin management service, the enhancements provide clients with a fully automated system that facilitates the entire margin call and collateralization process, improves reporting capabilities and reduces operational risk.
A variety of in-house systems and vendor solutions support collateral management for OTC derivatives, repo and securities lending products, according to a report by InteDelta, which surveyed collateral management supervisors in 15 banks, including seven of the G-14 group of major dealers.
Convergence of collateral management onto a single platform remains challenging as there are no vendor products that fully support all product types, according to InteDelta.
All of the participating banks cited an increased need for better collateral inventory management and optimization solutions.
“This reflects the need to maximize the efficiently with which collateral inventory is managed in light of the constraints imposed by central clearing regulations, including requirements for two-way initial margin, segregation of clients collateral and collateral eligibility requirements of the central clearinghouse,” the report said.
Of the banks surveyed, all are or expect to become clearing members of one or more CCPs. In the case of the larger G-14 dealers, the default assumption is that the banks will become a clearing member on all of the evolving CCPs in order to support the broadest possible client clearing service, the report said.
BNY Mellon Clearing has joined CME Group as a clearing member firm in order to clear over-the-counter interest rate swaps.
As a registered FCM, BNY Mellon Clearing provides direct clearing services with major exchanges and central clearinghouses, including the New York Mercantile Exchange and Chicago Board of Trade, which are operated by CME Group, and International Derivatives Clearing Group. The company expects to continue to expand the roster of exchanges it clears through, as well as expand its operations globally.
“In most cases, the scope of client clearing services is yet to be finalized, and will evolve to reflect the developing market structure as new CCPs and cleared products emerge,” said the InteDelta report.
Clearinghouses are enabling customers to choose whether or not to have their collateral kept separate from that of other customers.
The CFTC has proposed that futures commission merchants (FCMs) and derivatives clearing organizations (DCOs) 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.
However, CME also favors permitting cleared swaps customers that desire or require full physical segregation of their contracts and associated collateral to opt out of the commingled customer account of their FCM.
