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DTCC
Global Initiatives and Collateral Processing
November, 2013
Mark Jennis, Strategy and Business Development
John Straley, Strategy and Business Development
1[Classification]
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One of the leading post-trade market infrastructure organizations in the financial services industry, standing at thecenter of global trading activity.
For 40 years, have played a critical role in reducing risk and protecting the global financial system, while
delivering cost efficiencies and innovative post-trade solutions.
User-owned, provider of clearing, settlement, asset servicing, global data management and information servicesacross multiple asset classes.
Process securities transactions valued at approximately US$1.6 quadrillion.
Provide custody and asset servicing for securities issues from 131 countries and territories valued at US$37.2trillion.
Global trade repositories record more than US$500 trillion in gross notional value of transactions made worldwide.
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Who are we?
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Capital & liquidity requirements under Basel III / CRD IV
Clearing of OTC derivatives under Dodd-Frank & EMIR
(Margining) discipline
Collateral rules and restrictions
Collateral monitoring by CCPs
Access to sources of liquidityGlobal
Complex
New
Facing a collateral revolution
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transactions volumes
- Margin calls in OTC derivatives between 500 and 1,000 per cent?
demand for collateral
-US$800 billion? US$4 trillion? US$10 trillion?
interconnected players and segments
need for transparency
need for communication standards
operational risks
costs (incl. cost of funding)
Facing a collateral revolution
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Market participants facing more
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Facing a collateral revolution
and more interconnectedness
Commercialbanks
Repo
Central banks
Reservemanagement
Open-marketoperations Repo, SecLending
Collateral
CCPMargin Margin
Corporatetreasurers
Repo,SecLending
Repo
MarginMargin (quad-party)
Investmentbanks
Commercialbanks
Buy-SideAgent/Custodian
CCP GC
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During extreme market stress the volume and value of margin callscan increase exponentially
Lack of process and certainty around intra-day obligations and
settlements can magnify intra-day exposure and funding squeezesduring extreme market stress
Lack of transparency around collateral obligations and settlementsleaves counterparties prey to rumors or partial information whichcan cause market reactions that make life very difficult for policy-makers and overseers attempting to manage a crisis
Lack of full understanding of available collateral and ability to bringit to bear when needed during market events exacerbatescollateral shortfall issues and challenges
Margin processing
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Non-STP margin processing creates systemic risks
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The end-state?
Regulators taking aim at market stability, resilience &transparency
Market participants confronted with increase in transactionalvolumes and risks
Collateral Supply/Demand questions are inevitable
Optimal collateral management requires greater integrationacross products, asset classes and geographies
Tremendous opportunities for improvement all along the trade& post-trade processing chain
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Uses ofCollateral
Underlying exposure OTC Derivatives Margin Listed Derivatives Margin
Repo Sec.Lend CentralBk credit
Bilateral Cleared F & O Cash
CollateralManagement
Collateralscreening
CollateralValuation
ExposureMatching
CollateralOptimization
Collateralreporting
Custodians/ Agent Banks / (I)CSDs Central Banks
Cash $, , ,
Sources&
Settlementof
Collateral
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Collateral management: a framework
InventoryMgt.
Settlementmonitoring
Securities $, , ,
FoP SecuritiesSettlement
Cash-onlySettlement
DvP SecuritiesSettlement
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10REFERENCE
DATA REPORTING
Solutions supporting 6 main steps:
1. Data & Deal Management
2. Margin Calculation
3. Margin Management
4. Collateral Optimization
5. Settlement
6. Record Keeping
And 3 more generic themes:
1. Reference Data to drive systemizedprocessing
2. Reporting at each stage of theprocess to keep control
3. STP processing to gain in efficiencyand mitigate operational risks
OTC Derivatives post-trade processing chain
Data/DealManagement
Data/Deal CaptureData/Deal Validation & deal MatchingPortfolio Reconciliation
MarginCalculation
Trade valuationsExposure Calculation & Portfolio MarginingMargin Calculation
Margin
Management
Margin Call Messaging
Dispute Management
Collateral
Optimization
Collateral sourcingCollateral transformationCollateral allocation
Settlement
Settlement Staging & NettingCash Settlement / Securities SettlementSecurities Segregation
Settlement Fails Resolution
RecordKeeping
Collateral Record KeepingCollateral ReportingCollateral Safekeeping
STP
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DTCCDTCC Restricted (Red) Confidential Treatment Requested by DTCC/DTC/NSCC/FICC Pursuant to the Freedom of Information Act11
Margin Transit Objective, Scope and Drivers
Data Validation & Deal Matching
Data Capture
Portfolio Reconciliation
Margin Calculation
Position Aggregator & C ollateral Optimization
Dispute Management
Margin Call Matching & Messaging
Funding
Collateral Transformation
Settlement Staging & Netting
Securities
Settlement &
Segregation
Fail Resolution & Reconciliation
Collateral Reporting & Recordkeeping
Cash Settlement
ExposureCalculation
Margin
Management
(AcadiaSoft)
Collateral
Optimization&
Funding
SettlementServices&Recordkeeping
Objective: To develop a global straight-through processing solution, whichaddresses the substantial costs and risks (including systemic risks) of the
margin process for all OTC bilateral and cleared products.
Business, Risk and Regulatory Drivers
Regulatory changes, mandated clearing, and the new ISDA credit support
annex, are expected to increase margin calls and collateral settlement
activity by a factor of 5-10.
Managing the settlement of payments has become a major pain point.
Treasury/funding managers are concerned about the lack of transparency
and certainty regarding the settlement of daily margin obligations.
Desire to leverage the global trade repository for portfolio reconciliation,
margin calculation, and regulatory reporting.
Increased concerns about managing the growth of segregated accounts
for initial collateral.
Non-STP margin processing creates considerable systemic risk, particularly
during financial crises.
In Scope
Margin TransitOut of Scope
Margin Transit
MBS Forward Trade Matching & Repository
Margin Calculation/ Aggregation
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Margin Transit:Straight-Through Processing of margin calls
Matching Engine for DerivativesMargins
Matching Engine for DerivativesMargins
Transform matched/calculated margins to settlement instructions(for cash transfers and securities pledges/segregation); enrichwith SSI data.
Multilaterally net cash payments
Receive negative affirmation from Custodians/Nostros Send Pledge/Transfer/Payment instructions to relevant platforms
at established settlement timeframes Effect necessary collateral reporting
Transform matched/calculated margins to settlement instructions(for cash transfers and securities pledges/segregation); enrichwith SSI data.
Multilaterally net cash payments
Receive negative affirmation from Custodians/Nostros Send Pledge/Transfer/Payment instructions to relevant platforms
at established settlement timeframes Effect necessary collateral reporting
Margin Transit Collateral Processing Utility
Products Supported: Derivatives - bilateral and cleared Repo/Reverse Repo Mortgage Backed Forwards Futures and Options
Collateral Types Supported: USD Cash
US Securities (Government &Corporate)
Euro Cash Non-US Securities
Market Participants Supported: Dealers Futures Commission Merchants
(FCMs) Buy-side Firms Investment Managers Custodians Administrators
Matched Derivatives Margin Calls
Non-US Securities
Central Bank Payment SystemsCentral Securities Depositories
Utility submits Net Settlement & Pledge/Transfer instructions for all parties.
Pledge/TransferInstructions
Net SettlementInstructions
Status Status
DTC/Custodian
CSD/ ICSD/Custodian
FRBNY
ECB
Euro Cash
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DTCC-Euroclear Memorandum of Understanding
Objectives
Assess the feasibility and potential opportunities to build and develop a cooperativerelationship to jointly offer collateral management services to DTCCs and Euroclearsrespective clients, and the market generally.
Considerations include the establishment of a link between certain existing collateral-related services and/or the development of additional services collectively referred toas the Linked Collateral Service.
Scope
Straight-Through-Processing of margin calls that have been agreed by partiesthrough an electronic matching service (e.g. AcadiaSoft).
Use Euroclears Inventory Management and Collateral Management technology acrossboth Euroclear and DTCC to allow seamless repositioning of assets between the EUand the US, including securities held in other asset holding locations that are part ofEuroclears Collateral Highway.
Linked Collateral Services
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Need for some harmonization of practices within the diverseecosystem of funds, investment managers, custodians, centralbanks, commercial banks, treasurers and dealers;
Need for collateral fluidity and optimization.
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Collateral management: Optimization & Settlement
CollateralManagement
Collateralscreening
CollateralValuation
ExposureMatching
CollateralOptimization
Collateralreporting
Custodians/ Agent Banks / (I)CSDs Central Banks
Cash $, , ,
Sources&
Settlementof
Collateral
InventoryMgmt.
Settlementmonitoring
Securities $, , ,
FoP SecuritiesSettlement
Cash-onlySettlement
DvP SecuritiesSettlement
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Industry Value Proposition
Risk Reduction
Counterparty risks due to fails
Intraday funding and exposure
Elimination of manual processes in both margin and collateral mobilization processes
Increased transparency per linking collateral data w/ Global Trade Repository
Operations and Systems Cost Reduction
Operating and technology maintenance and development costs
Margin and settlement personnel Fail processing, compensation claim and credit overages costs
STP as a result of leveraging derivatives repository to calculate margin calls
Financing Cost Reduction and Balance Sheet Savings
Funding (a.o. transparency, netting, pooling of collateral resources)
Capital costs (a.o. less funding volatility, simultaneous settlement)
Shorten the margin lifecycle and collateral mobilization to same day
Increased Scalability, Capacity and Productivity
Meet Increasing collateral demand resulting from market and regulatory changes
Capacity to handle volatility of processing during times of stress
Centralized Economies of Scale by leveraging DTCC and Euroclear platforms15
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1) During extreme market stress the volume and value of margin calls can increase exponentially The proposed linked service will create a centralized, automated front to back collateral process that provides a greater
capacity to handle high volumes of margin calls, a real-time view of margin and settlement activity that is visible by allparticipants, a secure communication protocol between constituents and standard reporting on-demand.
2) Lack of process and certainty around intra-day obligations and settlements can magnify intra-dayexposure and funding squeezes during extreme market stress
The proposed linked service will help reduce intra-day exposures and funding squeezes. Payment fails will be reducedsubstantially due to payment netting and simultaneous settlement during standard cycles through out the day, and direct
links to Central Banks and depositories will facilitate the more efficient and timely movement and safekeeping of collateral.
3) Lack of transparency around collateral obligations and settlements leaves counterparties prey torumors or partial information which can cause market reactions that make life very difficult forpolicy-makers and overseers attempting to manage a crisis
The proposed linked service will provide full transparency intraday regarding the status of margin calls and collateralactivity through standardized reporting. The collateral information will ultimately be linked to the derivative deal andexposure information which is part of DTCCs Swap Data Repository. This will allow regulators to be more proactiveduring a crisis and gain a better understanding of the scope and origin of a problem.
4) Lack of full understanding of available collateral and ability to bring it to bear when needed duringmarket events exacerbates collateral shortfall issues and challenges
The proposed linked service will provide for the seamless pooling and allocation of collateral regardless of geographiclocation or jurisdiction. This enables funding managers to have a more accurate view and control of their collateral supplyand to better prioritize the collateral obligations.
Systemic Risk Reduction
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Questions?
Thank You!!!
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