Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
This single aspect of the regulations will create major challenges for many buy-side participants in the areas of liquidity management, operational risk, trading strategy and, ultimately, investment performance. This OpenCollateralSM News article explores these effects and examines some of the options available to investment managers to use collateral most efficiently.
timings for the introduction of mandatory central clearing for specific derivative types. However, the overall thrust remains clear: Investors should expect sharp increases in the levels of collateral they will need to manage in the future.
Investance
02 Collateral Optimization
they can also avoid the interest costs on receiving cash. The key requirement to support this procedure is a robust and versatile collateral management system that includes automated daily valuations of all collateral positions incorporating eligibility checking, credit rating review and haircut calculations for every CSA under management.
Investors naturally need to satisfy themselves as to the market risk they are facing and to ensure that any reinvestment vehicles selected conform to their investment guidelines. Subject to these constraints, cash sweeps can deliver significant improvements on collateral holding costs. Collateral upgrade: An idea much discussed in recent
Asset selection also forms a crucial part of this capability the function of identifying which assets are available for use as collateral (by earmarking or moving to a separate account) and ensuring that the current, prioritized list of eligible assets is available at the time of any margin call. Finally, systems for tracking forthcoming coupons and redemptions and triggering the necessary substitutions are also essential, along with a clear protocol for the rapid liquidation of counterparty assets in the event of default. Rehypothecation: Permitting the reuse of securities rehypothecation can further enhance collateral efficiency by minimizing the demand on the funds own inventory. In this context, rehypothecation refers to collateral received from one counterparty (i.e., in-the-money positions) being used to meet a collateral obligation to another counterparty (i.e., out-of-the-money positions) of the same fund. Naturally, rehypothecation requires effective systems to track all collateral inflows and outflows, so that the train of movements can be easily reversed in the event of a recall from the original provider of the collateral. Funds also need to give consideration to the risks they face under their ISDA agreements if they fail to return counterparty collateral within the agreed time lines. Cash reinvestment: The interest shortfall on cash collateral held can be mitigated or wholly eliminated by the reinvestment of cash received into appropriate short-term instruments to the extent that re-investment of cash collateral is permissible. The use of automated daily cash sweeps help ensure that the maximum amount of cash is reinvested and can be configured to meet any liquidity constraints.
months has been transforming ineligible assets, such as corporate bonds or equities, into widely accepted collateral. However, many of these solutions are based on secured lending lines from counterparty banks and are thus subject to the usual constraints of this type of transaction, including eligibility, cost, availability of balance sheet and commitment in times of market stress. An alternative approach, which may be a good fit for larger funds with high-quality assets, is a three-month evergreen lending transaction in which the fund lends a portfolio of assets in return for cash and pays a spread to the borrower. This arrangement is typically brokered by a securities lending agent and has the benefit of providing a degree of funding commitment, without the need to liquidate any underlying positions.
Collateral Optimization 03
The planning task is further complicated by the longer-term impact of central clearing on bilateral trades. As many OTC derivatives move to CCPs, investors will find that some of their existing ISDAs will become redundant, so overall capacity demands will diminish after the initial spike. Uncertainty over the timing of introduction of central clearing for different instrument types makes it hard for many investors to forecast how quickly these effects will occur, which in turn makes it difficult to justify significant capital investment in new systems and operations. For these reasons, many investors are now considering an outsourced approach to collateral management to provide the capacity and capability they need, but on a variable cost basis.
For additional information: Americas: Daniel Ulrich dan.ulrich@citi.com Europe, Middle East and Africa: Fergus Pery fergus.pery@citi.com Asia Pacific: Pierre Mengal pierre.mengal@citi.com
Conclusion
New derivatives regulations in Europe and the U.S. will likely have a significant impact on collateral management for many investors leading to an increased focus on the efficiency with which collateral is used and managed. A number of practical steps are available to many buy-side entities to improve their collateral efficiency, provided they have the operational know-how and capacity to support more complex collateral arrangements. Given the continued uncertainty over the timing of the start of central clearing and of its consequent impact on bilateral relationships, many institutions are delaying decisions on new systems and processes. However, those that implement flexible and scalable solutions soon could be best placed to manage collateral efficiently and reduce performance drag on their funds. Fergus Pery Global Head of OpenCollateralSM Global Transaction Services, Citi
www.transactionservices.citi.com
2012 Citibank, N.A. All rights reserved. Citi and Arc Design is a registered service mark of Citigroup Inc. OpenCollateral is a service mark of Citigroup Inc. 905110 GTS25865 02/12