Incentage Customer Event Zurich

Transcription

1 Strate Collateral Management Services Incentage Customer Event Zurich Presented by : Ant van Eden (Strategic Projects Director) Date: 6 November 2104

2 Key Drivers Requiring Greater Collateralisation 2 G20 BASEL III International financial stability Strengthen bi-lateral risk management; Increase Capital Requirements; Increase transparency and Asset Safety; Central Clearing of standardised OTC derivatives; Trade Repository Greater regulatory capital requirements (Liquidity Coverage Ratio & Net Stable Funding Ratio) Credit & Debit & Fair Value Adjustments; Stress testing Minimise market liquidity risk CPMI- IOSCO Solvency II Increased transparency; Asset safety Asset safety - segregation Scarcity of cash as collateral; Collateral management systems and Limited practices high quality Central Clearing of OTC derivatives eligible eligible assets collateral Re-evaluation of qualifying securities Risk mitigation Increased solvency capital requirements for Insurance Companies (Solvency II) FMA Reg. 28; Increased asset safety; Collateralisation. Central Clearing of OTC derivatives; Trade Repository Dodd Frank, EMIR Increased asset safety; Collateralisation. Central Clearing of OTC derivatives; Trade Repository 2

3 Timeline for Regulatory changes which impact collateral 3 BASEL Liquidity Coverage Ratio (LCR)) 0% 60% 70% 80% 90% 100% k n o w n BASEL Net stable funding ratio (NSFR) Solvency Assessment and Management (SAM) u n k n o w n Development of Regulation 28 G@20 - Mandatory central clearing OTC derivatives (CCP) ; Collateralisation non-cleared OTC derivatives TEquities settlement cycle move t+3 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018 Jan 2019 Jan 2020 Increased demand for HQLA as collateral

4 The Collateral Landscape 4 Hedge Funds Counterparty Banks CCPs Brokers Banks Central Bank Lending Desks Asset Managers (CIS, Pension Funds) Money Market Funds Institutional and Corporate Treasuries

5 Current South African Market trends 5 Unsure of the full impact of regulations on the availability of high quality liquid assets (HQLA) cash and government bonds top 40 equities? South African Reserve Bank (Central Bank) Committed Liquidity Fund enable banks to meet Basel III liquidity ratios Currently collateral moves on t+1 or later Uncertainty of current size and location of collateral Often over-collateralised Long lead times required for collateral recall trade settlements and Corporate Actions/Capital Events Tighter equity settlement timelines with t+3 Uncertainty of current costs of placing collateral 5

6 Current South African Market trends (continued) 6 Banks charging counterparties Credit Value Adjustment (CVA) market value of counterparty credit risk Absence of formal lending agreements such as ISDAs, ISLAs and GMRAs; Term deposits uncollateralised OTC derivatives do not carry buffer amounts /initial margin Unsophisticated collateral management systems significant manual intervention Decentralised management of collateral Financial exposures collateralised largely by cash (banks demanding cash for LCR & funding) Lack of transparency through convoluted account structures 6

7 Exposure Current South African Collateral Market 7 Multiple collateral silos between Bilateral counterparts A B C AND Multiple collateral silos Securities lending & borrowing OTC derivatives - bilateral CCP Debt D E F Central Bank Many manual interventions operational risk Administrative burden of using securities as collateral (i.e. regular valuation, disposals, processing Corporate Actions/Capital Events and collateral substitutions )

8 Current South African Market Collateralisation 8 No collateral (+- 10%) Scarcity of cash Only Cash Collateral A need (+- 60% to ) use securities as collateral Securities and Cash Collateral (30:70%) Unsecured Lending On-Market & OTC Derivatives Securities Lending and Borrowing Cash to collateralise - still KING!! 8

9 Use of cash as collateral 9 Advantages/benefits: High quality eligible collateral Easily transferable within the current banking systems Does not require daily revaluation Disadvantages/risk: Fungible risk of recovery and the resolution process Exposure to Exchange rate fluctuations Low returns when used as margin Opportunity cost Liquidity management Replace cash margins with high quality lazy assets 9

10 The Clearstream Partnership 10 Global Footprint

11 Why Clearstream? 11 Clearstream is an International CSD > 25 years in Collateral Management services in Europe Collateral Management services used by 54 Central Banks Provider of collateral management services to several Central Counterparties Outsourced its collateral intelligence on a white-label basis, to domestic market CSDs since mid-2011: It s a global problem so global solutions are needed; CSDs are well positioned to provide centralised collateral management solutions due to their independence, very low risk profile and centralised notary function for securities; Partnership extends reach, reduces costs and enables cross-border collateral optimisation; Liquidity Alliance members are leveraging their central position and expertise proactively and so are differentiating themselves from their competitors

12 The Liquidity Alliance (LA) 12 South Africa Brazil Europe Australia Europe LOI Canada CSD Singapore SGX Norway - VPS Global Collateral Optimisation

13 Centralised Outsourced Collateral Management Internal and Market-wide Collateral Optimisation and Tracking 13 C C C C C Same colour dotted line or the block (marked with a C ) for those which connect to Strate already: C C C Mobilising the Right collateral for the Right exposure at the Right time

14 Features of Tri-Party Collateral Management All non-cash collateral moves are centralised at the CSD in transparent segregated depository accounts Keeps an audit trail of all collateral moves into segregated received accounts to ensure that the location of collateral is always known Selling of received collateral in the open market (outside of the collateral pool) is prohibited to ensure that collateral can always be returned to the collateral giver along the original reuse chain Contracts under pledge, unauthorised collateral re-use or limited re-use is controlled within the solution. Regular reporting on collateral movements at counterparty, custodian and Strate level for all non-cash collateral to authorities In the event of insolvency or contractual default, a Tri-Party solution can provide immediate information to authorities of the collateral re-use chain and can freeze any further collateral movements on the contracts or all contracts of the counterparty concerned until instruction from the liquidator/curator 14

15 Features of Tri-Party Collateral Management (continued) Company, market and global optimisation 15

16 Scope for Phase I 16 Domestic Collateral Domestic Exposures Equities Bonds Money Markets SLB REPO CCP Cash OTC Central Bank

17 Scope for Phase II & III 17 Cross Boarder Optimising Global Collateral Pools Foreign held assets for local exposures Local assets for foreign exposure

18 Strate Collateral Management Solution Financial Exposures 18 Interbank Repos Bi-lateral OTC derivatives Central Bank CCP Securities Lending Exposure Submissions - Portfolio or Transaction (Strate Collateral Online, SWIFT or CSV) Client A Client B IMS* Collateral Management Clearing & Settlement Movement within Strate SDA accounts Prevention of unauthorised re-use Facilitation of cash movement Corporate Actions/Capital Events Audit trail of collateral movements Collateral Intelligence Matching (tolerances) CSA validation/eligibility Allocation Valuation Substitution Optimisation Reporting *Standard messaging formats,conversion and suppression

19 Optimised Automated Bi-lateral Collateral Management 19 Validation Reporting Eligibility Profiles Top-up, Returns, Cash Calls Daily Collateral Valuations Substitutions Collateral Allocation Buffers Haircuts Minimum tradable amounts Concentration Limits Eligibility Changes Mobilising the Right collateral for the Right exposure at the Right time

20 Collateral Management Services 20 Enhanced risk management : Segregated Depository Accounts ; Automated substitution requires eligible collateral to be placed before original collateral returned; Control and tracking of authorised reuse; Collateral returned along the reuse chain; Prevention of disposal of collateral placed; Ensure financial exposures optimally collateralised throughout the day and Fully automated solution reduction in concomitant operational risk to the market. Securities placed as collateral remain in the local jurisdiction ; Facilitation and reporting of cash collateral placed/received as collateral; Back-office efficiency and cost savings from outsourcing to a collateral agent - Strate; and Complimentary to bi-lateral management solutions Mobilising the Right collateral for the Right exposure at the Right time

21 Challenges 21 Legal challenges: Exemption from taxes currently levied on equities and bonds ceded as collateral and on collateral returned Europe Financial Transfer Taxes (FTT); Certainty of regulatory implementation timelines - Basel III, Solvency II, G20 requirements for OTC Derivatives mandatory central clearing and Trade Repositories;and Foreign Exchange control approval for cross boarder collateral optimisation Competition Differentiation between triparty and bilateral collateral management solutions; and Other triparty collateral management service providers Mobilising the Right collateral for the Right exposure at the Right time

22 Outlook 22 Client take-up 2 banks collateralise interbank lending Securities Lending Desks BANKS Fund Managers Life Insurance CCP Mobilising the Right collateral for the Right exposure at the Right time

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