Importance of CSDs Providing Tri-Party Collateral Management Services

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1 Importance of CSDs Providing Tri-Party Collateral Management Services Monica Singer (CEO) May 2015 Cancun Mexico

2 Collateral Management Drivers Post Global Financial Crisis Mandatory capital adequacy and liquidity benchmarks 2 Greater segregation of collateral assets Mandatory clearing of OTC derivatives Restricted re-use of collateral securities Global fragmentation of collateral REGULATION Basel III; G20 Solvency II; CPSS-IOSCO; EMIR; Dodd Frank Collateralisation of non-cleared OTC derivatives Increased level of collateralisation of bi-lateral transactions More demand for collateral from buy-side Increased demand for HQLA as collateral Secured Money Markets replacing clean credit

3 Collateral Management Challenges for Market Participants 3 Collateral identification and location Collateral mobilisation Collateral optimisation What do I have? Where is it located? Can I move it? How? Timeframe What is the cheapest to deliver? Impact on my underlying portfolio? Collateral transformation Do I have the right collateral? If not, how do I transform it?

4 Challenges Collateral Challenges for Market Participants 4 Asset safety Scarcity of cash as collateral; Limited high quality eligible assets Re-evaluation of qualifying securities Risk mitigation

5 Why CSDs should provide Tri-Party Collateral Management Services? 5 regulated neutral financial market infrastructures operating under local legislation are the definitive record of ownership of financial instruments in any market can ensure the appropriate segregation of collateral with the aid of Tri-Party collateral management technology, can restrict and track the authorised re-use and controlled return of collateral along the entire re-use chain ideally positioned for collateral based regulatory reporting requirements and adapt services to deal with regulatory changes on a centralised basis have local market scale and connectivity to CSD participants and business partners, enabling a lower total cost of collateralisation for an entire market can provide level playing fields for institutions with sophisticated collateral management solutions and those without

6 Collateral Services Provided By Some CSDs 6 Settlement of bi-lateral collateral transactions pledges and free of payment transfers Special purpose collateral services e.g. CCPs, repos, securities lending, OTC derivatives Centralised integrated provider domestic only Centralised integrated provider domestic and international

7 Exposures Fully Integrated Local & Global Tri-Party Collateral Management Services Securities lending & borrowing OTC derivatives - bilateral CCP Repos Debt Central Bank Reporting Automatic Topup, Returns, Cash Calls Validation Eligibility Profiles Collateral Valuations 7 Securities remain in local jurisdiction; Securities move near real time; Respecting local regulation and legislation. International Interoperability and Partnerships Automatic Substitutions Automatic Allocation of collateral Tolerances Haircuts Minimum tradable denominations Concentration Limits Eligibility Changes

8 Key Considerations for CSDs to Provide Fully 8 Integrated Domestic & Foreign Tri-Party Collateral Management Services Centrally manage globally fragmented exposures and fragmented collateral pools Prevent systemic risk by not having one central international collateral management service provider Decentralise global collateral management services - assets should remain in the local jurisdiction moving under local legislation Interoperability essential at an international level with other financial market infrastructures (FMIs) in the collateral management space through a partnership philosophy.

9 Steps for CSDs to Provide Fully Integrated Domestic & Foreign Tri-Party Collateral Management Services 9 o o o o Step 1: Local - Local FMI to collateralise local exposures with local assets Step 2: Outbound offer domestic customers the ability to mobilise domestic collateral to cover international exposures (e.g. international CCP initial margin) Step 3: Inbound - offer domestic customers the ability to mobilise international collateral to cover local exposures (e.g. domestic CCP initial margin) Future: connectivity to Agent Banks, local custodians and maybe others.

10 Liquidity Alliance 10

11 THANK YOU Monica Singer CEO Strate Pty Ltd Follow us on Twitter, Facebook and LinkedIn