Collateral Management will take Paradigm shift under Dodd Frank & EMIR

Well some of the Big banks granted two-year phase in to meet Dodd-Frank rule to wall off swaps, as the phase 2 imgescommenced from June 10th 2013.

The shift towards OTC clearing is a huge collective undertaking for clearing houses, clearing firms and buy-side clients. The use of a CCP is a mutualised risk model that shifts the market away from what were exclusively bilateral arrangements – under master agreement and credit support annex (CSA) – to one where both the FCM (as a clearing house member) and the client will be required to post margin into the CCP. It is a radical departure. Many are still coming to terms with the concept that all derivative contracts like IRS and CDS (and not only interdealer ones) will now have to be cleared with initial margins and variation margins based on the mark-to-market’s daily fluctuations, just like exchange-traded derivatives.

One of the biggest concerns that hedge fund managers have relates to collateral management. Every day, all CCPs will demand (or return) “eligible” collateral, mainly cash and highly rated government bonds, thus generating more transfers, in both the number and value of movements, compared to the bilateral ISDA CSAs.

What this means, in a nutshell, is that the sheer volume of collateral that managers will need to monitor going forward is about to grow exponentially. Collateral management will become a spider web of complexity. Keeping track of margining requirements through the lifecycle of every derivative portfolio will be a daunting task.

Even though in Europe, the mandate to clear OTC derivatives under EMIR is not expected to be implemented until 2014 but the counterparties trade with US counterparties and fall under Dodd Frank regulation.And they face these initial margining requirements, we are seeing an increase in the amount of collateral needed by their clearing brokers.

Smart allocation – Collateral access:
Not only will managers have to pay variation margins to their clearing brokers in the currency of the underlying contracts, they will also need to post collateral on a same-day basis.

Having a clear view on the collateral/cash management position within the portfolio and its adequacy versus various margin requirements will be vital for the front office.

Collateral access – margin protect
Margin protect is just one part of the solution. This basically means that managers will have a much greater, automated process for securing, accessing and monitoring their collateral. This is vital when one considers the greater margining demands that may be imposed on non-cleared derivatives and as such is a distinct benefit to the clients.

Collateral access – direct to CCP
Another important addition to Collateral Access is Direct to CCP. This,is basically a “quick solution” to help all actors settle the collateral more efficiently. This is evidently understandable when one considers the number of actors involved in clearing through the CCP – the custodian, clearing broker, buy-side client, and the CCP itself – a quad-partite relationship.


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