The Collateral Challenge. Pierre-Dominique RENARD Group Head of Market Infrastructure EIFR 9 October 2013

Transcription

1 The Collateral Challenge Pierre-Dominique RENARD Group Head of Market Infrastructure EIFR 9 October 2013

2 Collateral: a scarce resource The regulatory leverage New EU regulatory regime : the introduction of the ESA s New UK regulatory regime : the introduction of the twin peaks regulatory model CPSS IOSCO: Principles for Financial market infrastructures 2 Dodd -Frank: Meeting the new CTFC requirements CRD IV will set the risk weights for cleared and non -cleared trades and the treatment for default fund contributions EMIR MiFID II: require standardised and liquid derivatives to be traded on exchanges/ platforms Bank for International Settlements: requirements for mandatory clearing of UCIT V AIFM collateral over -the -counter (OTC) derivatives.

3 Collateral: a scarce resource EMIR key impacts for clearing members in terms of margins & collateral Topic CCP EMIR requirements Indirect impact considerations Segregation and Portability De-netting Margin Models Higher margins Liquidity and Collateral Less available collateral Default Fund and Risk Waterfall Higher contributions CCPs must offer omnibus and individual client account structures across both assets and positions to the clearing members CCPs must offer portability in each account structure to allow the guaranteed transfer of client assets and positions; particularly in case of clearing member default Prescriptive rules on margin models (including pro-cyclicality) Margins models to include both normal and stress periods Wrong way risk and concentration risks to be taken into account Models to be reviewed regularly (internally ) Publish procedures on margin model testing, including parameters/values used CCPs must hold sufficient liquidity to perform their activities. Default of the 2 largest clearing members must be taken into account Only highly liquid collateral with minimal credit and market risk can be accepted Processes and procedures to monitor liquidity (concentration limits at the level of each clearing member ) Governance structure and process to perform regular haircut reviews Monitoring and management of wrong way risk for collateral Detailed stress testing framework, signed off by the Risk Committee and Board, which is used to calculate the minimum size of default fund The size of the Default Fund must be greater than the sum of its exposures to the two clearing members to which it has the largest exposures Dedicated own resources equivalent to 25% of capital requirements Management of and communications to direct clients & indirect clients (clients of clients of clearing members) System changes required in order to accommodate account structure changes and segregation models Changes to membership rules and contracts Client to adapt to new margin model (including procyclicality) Big Bang implementation impact Restrictions on the use of type of collateral Potential concentration controls and requirements around haircut calculations Loss sharing impact for members Replenishment rule change 3 3

4 Collateral in & out from a CCP standpoint (1 on 2) The 3 Collateral Routes Margins & Deposits CCP Investments & Liquidity Management Clearing of bilateral Repos & TriParty Baskets 4

5 Collateral in & out from a CCP standpoint (2 on 2) Margins & Deposits Variation Margins, Initial Margins, contributions to default Funds CCP Eligibility criteria and broad range of collateral accepted Safety and Protection are key words for a CCP 5

6 Collateral in & out from a CCP standpoint (2 on 2) Provide liquidity for settlement (injection) and remuneration to members on their deposits (investment) Access to Central Bank money is key «Cover 2» liquidity needs coverage No re-use of deposited collateral Margins & Deposits Variation Margins, Initial Margins, contributions to default Funds Eligibility criteria and broad range of collateral accepted Safety and Protection are key words for a CCP CCP Investments & Liquidity management 6

7 Collateral in & out from a CCP standpoint (2 on 2) Provide liquidity for settlement (injection) and remuneration to members on their deposits (investment) Access to Central Bank money is key «Cover 2» liquidity needs coverage No re-use of deposited collateral Margins & Deposits Variation Margins, Initial Margins, contributions to default Funds CCP Investments & Liquidity management Eligibility criteria and broad range of collateral accepted Safety and Protection are key words for a CCP 7 Clearing of bilateral Repos & TriParty Baskets Repos traded on most of European Sovereign debts through several trading/matching platforms. 75% of European bilateral cleared repos are cleared by LCH.Clearnet GCPlus as the value added leverage Focus

8 Collateral challenge GCPlus - Product - Basket Definition Classic Repos on two baskets will be offered (two ISINs being created). Baskets based on the Eurosystem s list of eligible collateral to obtain Euro Central Bank Money and basket 1 to be compliant with new standard ratio Liquidity Coverage Ratio Basket 1 ECB high issuance rating Basket 2 ECB eligible All securities eligible at Euro Central Bank Money refinancing in Euros only ECB liquidity classes L1A, L1B, L1C Issuance rating higher than A- (govies) AA- (other) ECB liquidity classes L1A, L1B, L1C, L1D Issuance rating higher than BBB- Support Liquidity Coverage Ratio Basel principles upon participant allocation strategy 8

9 GCplus Clearing participants Collateral challenge GCPlus - Product - Market Model (1 on 2) MTS / ICAP / Tullett Prebon Trading Anonymous cash-driven trading via e-platforms Fixed rate/term classic Repo out to one year Trading of two baskets covering 65% of ECB eligible securities LCH.Clearnet Clearing Cash funding collateralised by standardised baskets Low regulatory capital cost Robust risk management Exposure netting at clearing level Euroclear Autoselect Euroclear Bank / ESES Collateral management / Settlement custody Automated collateral management provided by Euroclear Full possibility of collateral re-use Interoperable CSDs between Euroclear Bank and Euroclear France National Banks (Banque de France...) Central Bank Potential for refinancing with Banque de France Future expansion to other CBs being explored 9

10 Collateral challenge GCPlus - Product Market Model (2 on 2) Risk Framework of GCPlus based upon the existing Fixed Income Framework with the inclusion of specific margins to comply with the nature of the product. Default Fund will be segregated, distinct from the Fixed Income one, and compliant with the ongoing evolution of the default funds structure within the LCH.Clearnet Group («skin in the game», living will ) Target Go Live is on 31 October 2013 with members tests to start during September

11 Collateral challenge Differentiating factors between CCPs 1. Overall safety: Soundness of the risks models (even if it leads to an increase of margins), robustness of the waterfall process, protection of customers assets & portability (see Appendix), etc. and Capital Exposure (close out netting, balance sheet netting ) 2. Range of covered assets, level of added value services especially Collateral Management id. collateral optimisation, way to post it, etc. 3. Fees 11

12 Collateral challenge Q & A Thanks for your attention 12

13 Zoom on Segregation & Portability 13

14 Segregation and Portability Definitions (1/2) Terminology Account Client Asset Value of Asset Omnibus Client Segregation Account (OSA) Individual Client Segregation Account (ISA) Definition A logical set of entries within the books and records of LCH.Clearnet relating to member and their client (see Account Nomenclature in section 2). An undertaking with a contractual relationship with a clearing member which enables that undertaking to clear its transactions with LCH.Clearnet. Assets refer to collateral, Cash and non-cash collateral (including securities and central bank guarantees as appropriate under LCH.Clearnet's published eligible collateral) provided to the clearing house by a Clearing Member for the purposes of Clearing to meet required margin calls all or lodged in excess of the required levels to meet future margin requirements, but does not include default fund contributions Post haircut value of the collateral, as determined by LCH.Clearnet policy A set of accounts holding Trades/Positions, Liabilities/Required Margins and Assets of more than one Client grouped together such that it may not be possible to separately identify the Assets held for one Client from those of another Client in the same omnibus account. Those Assets and Trades/Positions are kept separate from the proprietary Assets and Trades/Positions of the same clearing member, as well as from Assets and Trades/Positions of other clients of that clearing member. OSA can be categorised as Gross where the Trades/Positions and Liabilities/Required Margins are calculated for each individual Client but covered in aggregate by comingled Assets of all Clients in the omnibus account. OSA can be categorised as Net where the Trades/Positions are netted across the omnibus account and thus Liabilities/Required Margins are calculated for all Trades/Positions for all Clients in the account as a single portfolio and covered in aggregate by comingled Assets of all Clients in the omnibus account. An account holding Trades/Positions, Liabilities/Required Margins and Assets of one individual client of a clearing member and kept separate from the proprietary assets and Trades/Positions of its clearing member, as well as from Assets and Trades/Positions of other clients of that clearing member 14 14

15 Segregation and Portability Definitions (2/2) Terminology Net/Gross position Excess Collateral Unallocated Collateral Group Excess Client Definition In position-keeping accounts, recording a portfolio of gross trades relating to a single ISA, OSA or Clearing Member House Account generates a Position. Buy & sell trades are offset to determine a Net Position while buy & sell trades are not offset to determine a Gross Position (typically those trades in the same product with the same maturity date or tenor). Collateral deposited by a clearing member to LCH.Clearnet in excess of collateral required to cover positions within LCH.Clearnet. This excess exists at house compartment and client compartment level. For Client compartment, this excess collateral, for an individual segregated client or for an omnibus account, can be used for novation for client trades in the same account structure. Similarly, the excess collateral affected as house excess can be used for novation of house trades. LCH.Clearnet shall also offer a solution for additional collateral being lodged by the clearing member (for instance collateral asked by the clearing member to its clients above CCP requirements, mandatory for ISA, optional for OSA). This additional collateral will be put in the same excess collateral account and can be used also for novation For operational constraints, it is a temporary account at client compartment level - waiting for allocation from the clearing member. This collateral cannot be used for any novation. A pool of excess collateral for novation of client trades on house side. The value of this excess collateral pool will be segregated within the books and records of LCH.Clearnet from any other house or client collateral value and shall be used for novation of client trades only on a trade-by-trade basis, only for LCH.Clearnet services that provide trade-by-trade novation of client trades. At each margin run, the used-up value of the pool will be a liability and will be issued as a margin call to the member

16 Segregation and Portability LCH.Clearnet SA Key Segregation Decisions (1/2) Topic Principles Degree of segregation Segregation exists only within the books and records of LCH.Clearnet. LCH.Clearnet shall offer Individual Segregation and (Net and/or Gross) Omnibus Segregation to its clearing members. The decision on whether to offer Gross Omnibus, Net Omnibus or both rests within each Business Line. Clearing members will be able to operate multiple ISA and/or omnibus accounts LCH.Clearnet will offer a bookkeeping segregation with identification of assets where each House, ISAs and OSAs will have its own Collateral Account with the excess collateral management associated (even if there is no obligation for such excess collateral segregation at OSA level) There is no regulatory obligation for segregation of Client Collateral at external custodians or PPS Banks. This type of segregation called full physical segregation could be offered in the future (TBC) Clearing Member Affiliates Affiliates will be treated as clients in ISAs or OSA in the case where several affiliates are grouped in one omnibus account. Account Nomenclature Trade Account: Account in which the transactions are recorded. Position Account: Account in which transactions are grouped and netted together in order to determine the portfolio of positions on which the margins are calculated. Margin Account: Account that hold the liabilities of the clearing member calculated from the portfolio of positions or trades. Financial Account: Financial Account is an artefact related to systems in SA, specifically. It is a technical aggregation to link the clearing system (risk) to the treasury system. Each financial account will be linked to only one collateral account. This liability, in turn, will be passed on to the treasury system Collateral account: Account in which the assets are held as collateral 16 16

17 Segregation and Portability LCH.Clearnet SA Key Segregation Decisions (2/2) Topic Management of Excess Collateral Management of unsettled positions at intended settlement date (fails) in Delivery account (LCH.Clearnet SA Cash) Principles LCH.Clearnet will offer clearing members a facility for excess collateral management as follows: Individual Segregation: Value of specific assets making up excess collateral will be segregated at each client level. Net Omnibus Segregation: Value of specific excess collateral will be segregated at an omnibus level only. LCH.Clearnet will not be able to identify collateral value per client within the Net Omnibus account. Gross Omnibus Segregation: Value of specific excess collateral will be segregated at an omnibus level only. LCH.Clearnet will be able to identify the allocated collateral value per client within the Gross Omnibus Account based on margin requirement, but not the excess collateral value per client within this Gross Omnibus structure Collateral value affectation to an ISA or OSA may be based on a report from the clearing member to be decided at Business Line level. Any increase or decrease in the value of an asset following a change of haircut/price/fx value will be applied on the Excess collateral pool concerned. If the revaluation of the assets creates a shortfall or the need for additional collateral a margin call will be made. In the event of a clearing member default, LCH.Clearnet will not be able to use the collateral in the Unallocated collateral to meet any losses and should instead return it to the administrator of the defaulting clearing member (TBC, see question on slide 15). Unsettled cash securities positions will be maintained in segregated client accounts as necessary i.e. Individual Segregated Client fails will be maintained at Individual Segregated level and Omnibus fails at Omnibus level. They will be margined accordingly. ( NB : today, the unsettled cash securities positions of Client are commingled with the House ones for Delivery accounts.) 17 17

18 Segregation and Portability Portability and Liquidation: ISA and OSA Portability ISA The positions and assets of its ISA can be ported to a new clearing member of the same clearing house in case of default of the clearing member (if client makes a request and the new clearing member accepts it within a period of time defined by the CCP) (See question next slide). The porting process will require linking the client accounts and positions to the new clearing member. The assets themselves being deposited in a single all clients account at the CSD or PPS level may not need to be moved (e.g. could be moved if assets have to be deposited at another CSD or PPS than the original one for instance). OSA Portability of positions and collateral of Net Omnibus is possible only if all clients agree to be ported to the same receiving clearing member and the new clearing member accepts it within a period of time defined by the CCP (See question next slide). The same porting process as ISA applies. Portability of positions and collateral of Gross Omnibus is under study. Liquidation Positions and assets are liquidated and the P/L of the liquidation is returned to the client Available House assets in excess could be used (TBC) to cover losses on client accounts (but not the reverse). Preventing this would end up protecting the clearing member, which is del credere (ducroire) and would be against the spirit of the regulation. Positions and collateral are liquidated. 1. For net omnibus the P/L of the liquidation (positions and assets) is returned to the administrator of the clearing member 2. For gross omnibus the P/L of the liquidation (positions and assets) is returned to the clients using a pre-defined split key (See question next slide) Available House assets in excess could be used (TBC) to cover losses on client accounts (but not the reverse). Preventing this would end up protecting the clearing member, which is del credere (ducroire) and would be against the spirit of the regulation Group Excess Client At the time of default, the Group Excess Client: 1. if used for client novation will be used for liquidation purposes only 2. If unused it will be returned to the administrator NB : This amount can be used by the CCP to cover the member s house liabilities 18 18

19 External view Coverage view Account view Segregation and Portability LCH.Clearnet SA Segregation Model Clearing Member House House Trade/ Position account Trade/ Position account ISA Trade/ Position account Clients OSA Gross Omnibus Trade/ Position account Trade/ Position account OSA Nett Omnibus ISA 1 ISA 2 Affiliate Client 1 Client 2a Client 2b Client 3a Client 3b Trade/ Position account Trade/ Position account Margin account Margin account Margin account Margin account Margin account Margin account Allocated Collateral Allocated Collateral Allocated Collateral Allocated Collateral Allocated Collateral Excess House Excess Client Excess Client Excess Client Excess Client Group Excess Client Unallocated Collateral CBG DNB/BNB Target 2 ICSD - CSD Accounts Accounts Accounts Note: not including settlement