Repo X-COM Margining methodology. X-MAR Manual

Transcription

1 Repo X-COM Margining methodology Version 1.0 October 2016

2 1. FOREWORD IRMA MARGINS Penalty for failure Calculation of IRMA Margins with positive rate IRMA - Collateral Giver IRMA - Collateral Receiver Calculation of IRMA Margins with negative rate IRMA - Collateral Receiver IRMA - Collateral Giver INITIAL MARGINS Ordinary Initial Margins Initial margins on fail positions MARK-TO-MARKET MARGINS Page 2

3 1. Foreword The present document describes the methodology used to calculate Margins for guaranteed triparty repo contracts managed by X-COM, the triparty Collateral Management platform owned by Monte Titoli. The X-MAR methodology envisages the following types of margins: a) IRMA Margins (Interest Rate MArgins), which are intended to cover (a) the penalties charged by CC&G to the counterparty which fails to pay cash or deliver securities at the intended settlement date of the spot leg and (b) the payment of repo interest at the intended settlement date of the forward leg; b) Initial Margins, aims at covering the theoretical costs of liquidation, which CC&G would incur by liquidating the positions hypothesizing the most reasonably unfavourable market scenario. Increased Initial Margins will apply in case of unsettled forward leg due to lack of securities; c) Mark to Market Margins, covering any gap between the settled amount and the Market Value of the collateral verified at each MtM recalculation cycle. The margins described above can be covered both in cash and securities that meet the eligibility criteria established by CC&G. Page 3

4 Acronyms and abbreviations The following table shows the definition of acronyms and abbreviations used in this document. Table 1-1 Acronym and abbreviation Description SL Spot Leg (see Spot Leg ) FL Forward Leg (see Forward Leg ) Spot Leg First Leg of repo contract Forward Leg Second Leg or Term Leg of the repo contract ISD (Intended Settlement Date) Settlement date agreed in the contract ISD SL/ ISD Spot Intended Settlement Date of the Spot Leg ISD FL/ ISD Forward Intended Settlement Date of the Forward Leg FV SL Validity Date 1 of the Spot Leg, i. e. last day of re-cyclyng for the Spot date FV FL Validity Date of the Forward Leg, i.e. last day of re-cyclyng for the Spot date G/R Giver/Receiver (see Giver and Receiver) CG/Giver The party that must deliver securities on the spot date (the seller) C/R/ Receiver The party that must deliver cash on the spot date (the buyer) RR Repo rate 1 Collateral Instructions for guaranteed transactions which are not settled (in whole or partially) upon completion of the clearing and settlement processes on the ISD (are considered as fail and, only in case of lack of collateral, they are re-cycled during the clearing process of next days till the end of validity date (FV, up to five target days). Page 4

5 2. IRMA Margins Figure 2-1 and Figure 2-2 represents respectively the Margins applied to the two parties in two different scenarios: positive repo rates (RR> 0) and negative repo rates (RR <0). A negative repo rate means that the collateral receiver (the buyer who is lending cash) effectively pays interest to collateral giver (the seller who is borrowing cash). The following paragraphs provide a more detailed description of the methods and the timeframe of the calculation. Figure 2-1: XMAR workflow (RR>0) Figure 2-2: XMAR workflow (RR>0) Page 5

6 2.1. Penalty for failure IRMA margins are calculated in order to cover the penalties applied by CC&G to the participant in malis summarized in Figure 2-1 and Figure 2-2 resulting from the replacement of CC&G in the original contract. Two scenarios are considered: CC&G must replace one of the two parties at the end of the spot ISD due to nondelivery of securities or cash, and; CC&G must replace the Collateral Giver (Receiver) in case of positive rates (negative) for failure to pay interest at the end of the term ISD. The below tables outline the management of the repo rate contracts with positive and negative rates and the corresponding penalties applied in case of failure. The IRMA Margins are defined so as to cover the penalties in all case studies described. Page 6

7 Table 2-1: Penalty for failure - positive repo rate # Spot Leg Status Fail Fail Side Spot Settled amount Repo Interest Forward Leg amount Penalty 1 Settled (at ISD) N None Total Traded amount + Full amount of repo interest 2 Settled (but after spot ISD) Y Full amount of repo interest 3 Unsettled 0 Full amount of repo interest Securities None, The penalty is embedded because the seller will remain obliged to pay the full amount of repo interest to the buyer at the repurchase date, even if he delivers the collateral late and therefore has delayed use of the cash, or even if he never delivers the collateral and therefore never has use of the cash. 4 Partial Settled Partial settled amount + Full Partial (on ISD or later) amount of repo interest Yes, 5 Unsettled Cash proportional to the refinancing cost potentially withstood by Collateral Giver, under the hypothesis of recourse to central bank refinancing Page 7

8 Table 2-2: Penalty for failure - negative repo rate # Spot Leg Status Fail Fail Side Spot Settled amount Repo Interest Forward Leg amount Penalty 1 Settled (at ISD) N Traded amount + Full amount of repo interest (negative) None 2 Settled (but after spot ISD) Y Total Full amount of repo interest Traded amount + Full amount of repo interest (negative) Yes, Calculated in each day t from Spot ISD to the effective settlement date of the spot leg proportional to the unsettled amount Unsettled amount in t * ECB deposit rate where: Spot ISD t Spot FV Securities Full amount of repo interest 3 Unsettled Y 0 (negative) 4 Partial Settled (on ISD or later) Y Partial Partial settled amount + Full amount of repo interest (negative) Yes, Calculated in each day t from Spot ISD up to Forward ISD -1 proportional to the unsettled amount Unsettled amount in t * ECB deposit rate where: Spot ISD t < Forward ISD 5 Unsettled Y Cash Yes, Equal to the full amount of repo interest agreed in the contract due from the Collateral Receiver to Giver The case of partial settlement due to lack of cash it is not represented given that it is not allowed by the X-Com system. Page 8

9 2.2. Calculation of IRMA Margins with positive rate In a repo transaction with positive rate, the Collateral Giver (Cash taker) pays repo interests to the Collateral Receiver (Cash Giver). It follows that the forward leg countervalue is greater than the spot leg countervalue (the difference is the amount of repo interest). In the event of unsettled spot leg due to a lack of securities (in whole or in part), CC&G will pay to the Member in bonis an amount equal to the entire amount of interests agreed in the original contract. In case of unsettled spot leg due to a lack of cash, CC&G will pay to the Member in bonis an amount that takes into account the refinancing cost potentially borne by the borrower IRMA - Collateral Giver In the event of a settlement failure or a partial settlement due to a lack of securities, CC&G will debit a penalty to the failing Collateral Giver. Failed Contractual Positions on the sell side must be settled by the fifth day after the Spot ISD (L+5) and in any case within the day before the Forward ISD. After this deadline, the contract will be subject to an early termination by debiting the penalty (equal to the repo interest agreed) to the Collateral Giver (in malis) for the benefit of the Collateral Receiver (in bonis). To cope with this risk, the Collateral Giver is required to pay an IRMA margins equals to the repo interest agreed in the contract. Timeframe of calculation The IRMA margins payed by the seller are calculated by the first Margin calculation (intraday or end-of-the-day) following the trade date and up to the effective settlement of the interests. Page 9

10 Figure 2-3: IRMA Collateral Giver (RR>0) Calculation method The amount of repo interest for each contract is equal to the difference between the forward leg countervalue (repurchase price) and the spot leg countervalue. Therefore, the IRMA margin calculated for each contract for the Collateral Giver, equals to the repo interest, will be calculated as follows: IRMA (CG) = fwd CTV spot CTV Example 1 Spot CTV: Fwd CTV: Repo Rate: 0,45% ISD Spot: 24/07/2015 ISD Fwd: 27/07/2015 IRMA - Collateral Giver = = Page 10

11 IRMA - Collateral Receiver In the event of a settlement failure due to a lack cash, the contract will be subject to an early termination by debiting the Collateral Receiver (in malis) with a penalty (a cash amount commensurate to the refinancing cost). Timeframe of calculation The IRMA margins payed by the buyer are calculated by the first Margin calculation (intraday or end-of-the-day) following the trade date and up to the effective settlement of the spot leg. Figure 2-4: IRMA Collateral Receiver (RR>0) Calculation method In the event of a settlement failure due to a lack of cash, it is assumed that the Collateral Giver will resort to Central Bank lending facility. More specifically, it is assumed that the participant in bonis will make use of: (a) the ECB s Marginal lending facility (MLF) on day t when fail occurs and then (b) the Main Refinancing Operation (MRO) 2. 2 For IRMA/penalty calculation, such rates are assumed constant and equal to those in force at the trade date. Page 11

12 The IRMA margin, proportioned to the refinancing cost and to the amount of the loan traded, will thus be calculated as a sum of the following: a) the interest rate on the Eurosystem's marginal lending facility (MLF) for the day corresponding to the Spot settlement date, and; b) the interest rate on the Eurosystem's main refinancing operations (MRO) for each day comprised between the day after the Spot settlement date and the day preceding the Forward settlement date. Mathematically: IRMA (CR) = Spot CTV r MLF Spot CTV r ISD FL ISD SL 1 MRO [ ] 360 Example 2 Spot CTV: Fwd CTV: Repo Rate: 0,45% ISD Spot: 24/07/2015 ISD Fwd: 27/07/2015 MLF: 0,30% MRO: 0,05% IRMA - Collateral Receiver = [(0,3% + 0,05%*2)/360] = 1.111, Calculation of IRMA Margins with negative rate In a repo transaction with negative rate, the Collateral Receiver (Cash Giver) pays repo interests to the Collateral Receiver (Cash taker). It follows that the forward leg countervalue is lower than the spot leg countervalue. Page 12

13 IRMA - Collateral Receiver In the event of a settlement failure due to a lack of cash, the contract will be subject to an early termination by debiting the Collateral Receiver (in malis) with a penalty (equal to the repo interest agreed) for the benefit of the Collateral Giver (in bonis). To cope with this risk, the Collateral Receiver is required to pay an IRMA margins equals to the repo interest agreed in the contract. Timeframe of calculation The IRMA margins payed by the buyer are calculated by the first Margin calculation (intraday or end-of-the-day) following the trade date and up to the effective settlement of the interests. Figure 2-5: IRMA Collateral Receiver (RR<0) Calculation method In the event of a settlement failure due to a lack of cash, repo interests payed by the Collateral Receiver to the Giver are calculated on the traded amount. Page 13

14 Therefore, the IRMA margin calculated for each contract traded by the Collateral Receiver, equals to the repo interest, will be calculated as the difference between the forward leg countervalue (repurchase price) and the spot leg countervalue as follows: IRMA (CR) = abs (CTV Termine CTV Pronti) Example 3 Spot CTV: Fwd CTV: ,33 Repo Rate: -0,17% ISD Spot: 24/07/2015 ISD Fwd: 27/07/2015 IRMA - Collateral Receiver = , = ,67 = 1.416, IRMA - Collateral Giver In case of unsettled spot leg due to a lack of securities, the penalty charged to Collateral Giver will be proportionate to the Eurosystem deposit facility interest rate (supposed negative). It is assumed indeed that the Collateral Receiver (Cash Giver) will be forced to deposit cash to Central Bank for a period equals to the original maturity of the repo. Timeframe of calculation The IRMA margins payed by the seller are calculated by the first Margin calculation (intraday or end-of-the-day) following the trade date and up to the effective liquidation of the corresponding penalty charged to the Collateral Giver. The above penalty will be settled during the Daily Settlement: Page 14

15 the day after the effective settlement date of the Forward Leg, in case of partial or total settlement of the spot leg, but over the Spot settlement date; the day after the end of validity date of the Forward Leg, in case of settlement failure of the Forward leg; the day after the Forward settlement date, in case of total settlement failure of the Spot leg. Figure 2-6: IRMA Collateral Giver (RR<0) Calculation method As represented in Figure 2-6 the amount of IRMA depends on the status of the spot leg and varies accordingly. Three cases can be identified: 1) Trade date t < ISD Spot 3 : Between the trade date and the ISD spot the IRMA paid by the Collateral Giver are calculated on the entire amount negotiated (not yet being known the outcome of the spot 3 Intraday margins calculated in t = ISD spot fall within this case if the spot leg had not yet settled by calculation time. Page 15

16 leg settlement): ISD FL ISD SL IRMA (CG) = CTV Pronti TD [ ] 360 where TD represents the absolute value of ECB deposit facility interest rate in force at trade date 4. In case of total settlement of the spot leg at ISD Spot, the IRMA charged to the Collateral Giver will no longer be calculated. Example 4 We are between the trade date and the ISD spot (t = 28/07/2015) Spot CTV: ECB deposit rate: -0,20% Trade date: 27/07/2015 ISD Spot: 29/07/2015 ISD Fwd: 03/08/2015 IRMA - Collateral Giver = * -0,20% * 5/360 = ,78 = 2.777,78 Margin date (t) Spot CTV Repo rate Duration IRMA CG 27-jul ,20% ,78 28-jul 2.777,78 2) ISD Spot t effective settlement date (t ISD FL -1): Whereas spot leg is not yet completely settled at the end of ISD SL, IRMA due by the Collateral Giver are calculated on the unsettled amount for each day comprised between ISD Spot and the effective settlement of the forward leg. Unlike case 1) the IRMA will be determined as cumulated daily IRMA calculated on each day of fail and a projection of future IRMA, assuming that the unsettled amount remains unchanged until the day before the ISD FL. In mathematical terms: 4 The penalty (and consequently the IRMA) considers that rate invariable and equal to that in force at the trade date. Page 16

17 t IRMA (CG) = (CTV spot unsettled i i=isd SL TD ) + CTV spot unsettled ISD FL (t + 1) t TD [ ] 360 where ISD SL t ISD FL 1 where: CTV spot unsettled is the difference between the traded amount and the settled amount for the day t; TD is the ECB deposit rate in force at the trade date. The first term is the cumulative daily IRMA for each day of fail between ISD Spot and the margin calculation t; the second is the projection of IRMA for the days after t and up to the day preceding ISD FL. Example 5 We are between the ISD Spot and the day preceding ISD forward (t = 31/07/2015) CTV Spot: Settled amount in t: Unsettled amount in t: ECB deposit rate: -0,20% Trade date: 27/07/2015 ISD Spot: 29/07/2015 ISD Fwd: 03/08/2015 A B C D E F G H I Margin date Unsettled accrued IRMA Repo rate dd (1) dd (2) IRMA (1) IRMA CG (t) amount IRMA (1) projection (2) 27-jul ,20% ,78 28-jul ,20% ,78 29-jul ,20% ,56 555, , ,78 30-jul ,20% , , , ,78 31-jul ,20% , ,44 166, ,11 01-aug ,20% , ,78 83, ,11 02-aug ,20% , , ,11 Page 17

18 3) ISD FL t FV FL If at the end of the ISD term the contract and consequently the penalty charged to the Collateral Giver have not yet settled due to lack of securities, IRMA will be calculated until the effective settlement of the penalty The amount will correspond to the IRMA calculated in t=isd FL-1 (column I of the table below) or likewise to the sum of daily IRMA calculated between ISD SL e ISD FL-1 (column F ). Example 6 A B C D E F G H I Margin date (t) Unsettled amount Repo rate dd (1) dd (2) Daily IRMA (1) accrued IRMA (1) IRMA projection (2) IRMA CG 27-jul ,20% ,78 28-jul ,20% ,78 29-jul ,20% ,56 555, , ,78 30-jul ,20% , , , ,78 31-jul ,20% , ,44 166, ,11 01-aug ,20% , ,78 83, ,11 02-aug ,20% , , ,11 03-aug ,20% , , ,20% , ,11 FV FL ,20% , ,11 Page 18

19 3. Initial Margins Ordinary Initial Margins The Margins Initials are designed to evaluate the maximum possible loss in the event of closure of the positions in most unfavourable scenario of prices / rates movements. The amount of the Initial Margins is proportional to the haircuts provided set by CC&G for each security deposited as collateral. Timeframe of calculation Initial Margins are calculated starting from the effective settlement of spot leg up to the effective Settlement of the forward leg (ISD term or FV FL). Figure 3-1: Ordinary Initial Margins Calculation method When spot leg settles, the Collateral Receiver delivers a cash amount equal to X to the Collateral Giver who simultaneously provide the Receiver with an equivalent countervalue Page 19

20 of securities equal to X + H, where H represent the haircut countervalue applied 5. In order to ensure a proper risk management, Collateral Receiver will be request to pay an amount of Initial Margin equal to twice the Haircut applied (2H). Ordinari Initial Margin = 2 Haircut = 2 (CTV mercato CTV garanzia) where the collateral value is calculated as: Quantità (Prezzo + rateo) Valorisation ratio Collateral value = [ ] /100 (1 + Haircut) The valorisation ratio is equal to the product of pool factor and the indexing coefficient (for inflation-linked bonds). Esempio 7 CTV Spot: ,00 ISIN deposited: XS Quantity:: Price : 104,00 Accrual: 1,00 Valorisation ratio 1,00 Haircut: 5,00% Collateral value : ,00 Haircut (value) : 5.000,00 Ordinary Initial Margins = 2 x Haircut = , Initial margins on fail positions Fail positions due to lack of securities on the forward leg - for the counterparty in malis - are margined with the same methodology described above, keeping these positions segregated from the ordinary ones and applying, to the fail positions only, an increasing percentage 6 on margins (PM) for each day of fail (the maximum number of days is equal to the difference between the FV FL and ISD FL). 5 For the sake of simplicity, the interposition of CC&G is omitted. 6 Such percentages are reported on CC&G s website. Page 20

21 Initial margins on fail = Initial margins [1 + (PM number of days of fail)] In case of fail due to lack of securities at the ISD FL, the Collateral Receiver can return the securities until the day of the end of validity. Margins in fail Initials are no longer calculated once the securities have been delivered. Figure 3-2: Initial Margin on fails: Effective settlement after ISD FL 4. Mark-to-Market Margins Mark to Market Margins aim at covering any gap between the collateral value and the bilateral exposure. In order to ensure the alignment of positions at current market values, the X-COM system revaluates collateral both intraday and end of day and compare the value of the guarantees with the amount of bilateral exposure. Whereas the new value of the securities is lower than the bilateral exposure the system send a request to the Collateral Giver of securities integration (ACS - Automatic Search Collateral). If the guarantee amount is still insufficient to cover the amount of the bilateral exposures, CC&G will require the Collateral Giver a Mark-to-Market Margin after a certain interval of time (cut-off) from the ACS Page 21

22 generation in order to cover the difference. Timeframe of calculation The calculation of Mark-to- Market Margins starts from the effective settlement of the Spot Leg up to the ISD FL. Figure 4-1: Mark-to-Market Margin Calculation method Mark-to-Market Margins are calculated as the difference between the collateral value and the amount settled for the front Leg 7. Margini di Mark to Market = abs [min (Collateral value Settled Amount; 0)] Example 8 CTV Spot: ,00 7 After reaching the end of validity of the SL, if the repo is not fully settled, the amount of the forward leg will be cut down accordingly and set equal to the Settled Amount. Page 22

23 Settled Amount: ,00 ISIN deposited: XS Quantity: Price : 100,22 Haircut: 5,00% Collateral value : ,00 Haircut (value) : 4.820,00 Ordinary Initial Margins= 2 x Haircut = 9.640,00 Mark-to-Market Margins= min (96.400, ,00; 0) = 3.600,00 Page 23