933521 GTS25903 OCArticle - Citi · repos, OTC derivatives, clearing margining and structured...
Transcript of 933521 GTS25903 OCArticle - Citi · repos, OTC derivatives, clearing margining and structured...
Banks and broker dealers on the sell-side use
and re-use (“rehypothecate”) collateral to
cover their margin requirements with their
counterparties. Margin requirements are
typically driven by stock borrowing, repos,
OTC derivatives, clearing margining and
structured products. Collateral to meet these
margin requirements is sourced either from
the fi rm’s own inventory or from trading
activity with buy-side institutions such
as hedge funds, pension funds, insurers,
corporate or other institutional investors.
Collateral Convergence
Optimizing Effi ciency
Banks and broker-dealers on the sell-side
use and reuse (“rehypothecate”) collateral
to cover their margin requirements with
their counterparties. Margin requirements
are typically driven by stock borrowing,
repos, OTC derivatives, clearing margining
and structured products. Collateral
to meet these margin requirements
is sourced either from the fi rm’s own
inventory or from trading activity with
buy-side institutions such as hedge funds,
pension funds, insurers, corporate or other
institutional investors.
02 Collateral Convergence
Since September 2008, however, there has
been a substantial shift in the landscape of
the marketplace: A significant decrease in
the availability of collateral, largely driven
by market-wide deleveraging in the wake of
the global credit crisis. In a working paper
published last year (WP 11/25), the IMF
estimated that source-side collateral has
declined by as much as $5 trillion.
Alongside the reduction in source collateral
has been a corresponding increase in the
required amount of collateral. This is due to a
number of factors, but principally:
• Strictercollateraleligibility. There has been a
marked movement toward higher-quality collateral
and stricter testing of collateral, e.g., testing for
liquidity.
• Collateralizingpreviouslyuncollateralized
obligations. For example, counterparties that had a
high credit rating must now post collateral against
obligations that previously didn’t require them to post
collateral. Because of credit downgrades or a greater
focus on risk, trades such as uncollateralized OTC
derivatives and intraday credit lines are now often
collateralized.
• Regulatorydrivers. As a result of growing capital
requirements and/or mandatory collateralization,
new regulations in jurisdictions around the world
are focusing on risk mitigation via collateralization.
The clearing of OTC derivatives as mandated by
EMIR and Dodd-Frank will result in a major increase
in the amount of collateral that is required from
market participants. And from a capital requirements
standpoint, there will also be major impact on
collateral demand from BASEL III, Solvency II and
CRD IV.
Optimizing Collateral Efficiency
As with all instances of decreasing supply and rising
demand, the net result is an increase in the cost of
collateral and a drive toward its efficient use. At Citi, we
believe that efficiency in a collateral program may be
achieved by:
• Developing an optimization strategy (e.g., using
the lowest grades of collateral possible), with the
technology and operational capability to support it.
• Overcoming internal organizational silos and a culture
of segregation between trading desks (e.g., fixed
income vs. equity), therefore allowing:
• Centralizing and pooling of collateral and
processes by creating a virtual pool of collateral
across a firm’s entire holdings;
• Collateralizing centrally across all trade/
obligation types by netting obligations where
possible and ensuring that the pool of available
inventory is allocated as efficiently as possible
across a holistic portfolio of obligations.
• Reducing unnecessary buffers, i.e., where collateral is
held in reserve to mitigate late calls, risk of settlement
failure or missing market cutoffs.
• Transforming ineligible collateral for eligible, e.g., via
collateral upgrade or financing trades to “upgrade” to
higher-grade collateral or cash.
• Rehypothecating received collateral where permitted
by the underlying agreement and ensuring that
effective and automated recall management is
implemented.
Collateral Convergence 03
In 2012 and Beyond
Against this backdrop, market participants are facing a
hugely increased demand for collateral against a dwindling
source. In our view, the market will need to converge
toward a model that is:
• Asset-neutral— by leveraging a firm’s entire
inventory of assets across all asset classes, including
collateral that is available for reuse.
• Obligation-neutral — by looking at a firm’s overall
collateral requirements as a whole, rather than by
trade/underlying type.
• Custody-neutral — by ensuring that the asset
inventory held at multiple custodians can be
leveraged without the need for unnecessary
market movements or the maintenance of
inefficient “buffers.”
Besides a change in culture to move toward a centralized
model, a significant investment in technology and
operational expertise is essential to support an overall
collateral optimization strategy.
At Citi, we’ve developed our OpenCollateralSM service
to meet the increasingly complex requirements of
your collateral program and to help you succeed in an
ever-changing marketplace.
Fergus Pery
Global Head of OpenCollateral
Global Transaction Services, Citi
For additional information:
Americas:
Daniel Ulrich
Europe, Middle East and Africa:
Fergus Pery
Asia Pacific:
Pierre Mengal
GlobalTransactionServiceswww.transactionservices.citi.com
© 2012 Citibank, N.A. All rights reserved. Citi and Arc Design is a registered service mark of Citigroup Inc. OpenCollateral is a service mark of Citigroup Inc.
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