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Triparty Collateral Management
The efficient outsourced solution for managing and securing repo transactions
AMEDA meetingBeirut – 29 April 2010
Bernard FerranRegional Head, Relationship [email protected]
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• Introduction
• Repos and the repo markets
• Triparty collateral management
• Collateral Allocation Interface – Central Bank model
AMEDA – Beirut 29 April 2010Agenda
3
Lehman Brothersbankruptcy
A number of investment funds freeze redemptions
Leverage crisis and credit crunch turns into a full blown insolvency problem
Emergency rescueof Bear Stearns
• Drying-up of inter-bank market• Absence of term financing• Shortage of USD financing in Europe• Massive de-leveraging
Concerns about the valuation of
structured products
• Political willingness of the international community to look for a global solution to a global crisis• Coordinated actions of central banks
► Increasing intermediation role► Special term operations and securities lending schemes► A wider range of eligible collateral
9 Aug 2007 15 Sep 200813 March 2008
Market turmoilThe key milestones
4
Market turmoilEurepo/Euribor 3M
Rescue of Bear Stearns
0.00
1.00
2.00
3.00
4.00
5.00
6.00
10/0
3/2
002
08/0
2/2
004
08/0
1/2
006
27/0
4/2
007
17/0
9/2
007
07/0
2/2
008
01/0
7/2
008
19/1
1/2
008
15/0
4/2
009
03/0
9/2
009
26/0
1/2
010 0
20
40
60
80
100
120
140
160
180
200Euribor 3 M
Repo 3 M
Spread
Collapse ofLehman Brothers
Problems atNorthern Rock
Problems at IKB
Problems at Sachsen LB and West LB
Dillon Read HF
shut down by UBS
Bear Stearns shuts down
two HFs
Citi closes 7 SIVs
Aug 23 – ECB Long Term
Reserve Operation
Sep 12 – ECB Long Term
Reserve Operation
Dec 12 - concerted CB
action (FED, ECB, BOE, SNB) – TAF
auction
March 11 -Other CB coordinated effort
announcing $200bn of new emergency lending for banks
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• Unsecured market dried-up
• Term market disappeared
• Unsecured market dried-up
• Term market disappeared
• No more term financing
• Secured money market
•CCP GC baskets
• No more term financing
• Secured money market
•CCP GC baskets
• Massive intermediation
• Contingency schemes
• Massive intermediation
• Contingency schemes
UnsecuredMoney
markets
No collateral !
Central bank credit/liquidi
tyRoutine
(e.g. tenders, …)Contingency
Repo
Cash drivenSecurities
driven
Securities lending
Securities collateral
Cash collateral
• Concerns of final Beneficial Owners on certain cash reinvestment programs
• Concerns of final Beneficial Owners on certain cash reinvestment programs
+
---
A major crisisAcross all market segments
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• By order or priority, the money-markets investors will focus on
► Credit/counterparty risk
► Liquidity risk
► Return
What investors focus on ?Priorities
Need to find a secured financing solution
The repo markets
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From Unsecured to Secured FinancingThe club is growing
• Unsecured is no longer an option• Move to the secured space, in particular to the repo space• However, managing collateral brings new challenges:
►Operational risks, substitution, settlement, corporate actions, valuation, etc.
►Requires resources and know-how
•Cash investors (e.g. MMF, Corporates, hedge funds, insurance companies) as new entrants in collateral management opt for the Triparty Solution
8
• Introduction
• Repos and the repo markets
• Triparty collateral management
• Collateral Allocation Interface – Central Bank model
AMEDA – Beirut 29 April 2010Agenda
9
• What is a repo?► Repo can be defined as an agreement in which one
party sells securities or other assets to a counterparty, and simultaneously commits to repurchase the same or similar assets from the counterparty, at an agreed future date, at a repurchase price equal to the original sale price plus an interest
• History of repo► Created by the Federal Reserve Bank of New York in
1916► Boosted by the Glass-Steagall act of 1933 when US
investment banks massively started to fund their inventory (development of the ‘general collateral repo’).
Repos and the repo marketsAn introduction
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• What are the different repo products?► “Repos” – borrow of cash against securities► “Reverse repos” – investment of cash against
securities► “SecLending” - borrow against cash► “Total Return Swap”
Repos and the repo marketsAn introduction
11
A Dutch Bank A is trading a one-month repo with Spanish Bank B at a rate of 0.885%
SpanishBank B
€10,000,000 of DE0001134492DutchBank A
€ 12,157,315.07
D-dayD-day
D-day+ 1 month
D-day+ 1 month
SpanishBank B
€10,000,000 of DE0001134492DutchBank A
€ 12,166,579.96
Repos and the repo marketsThe mechanics of a repo trade
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• Firm financing► Borrowing cash to fund long positions in securities
• Match book trading► Traders make two-way dealing prices on repo
– Customers financing (hedge funds)– Proprietary trading
• Securities lending► Borrowing of securities to cover short positions► Structured trading
Repos and the repo marketsThe functions of a repo desk
14
• Legal risk► Market standard legal agreements (e.g. GMRA)
• Risk of default of counterparty► Thorough selection of counterparties
• Market and liquidity risk on securities collateral► Clear definition of acceptable collateral► Imposed diversification through concentration limits► Over-collateralisation of transactions through margins
• Operational risk► Settlement risk► Corporate event risk
Repos and the repo marketsRisks and risk mitigation
15
ICMA Survey (in €bn)
4,868
4,633
2,298
6,5046,3826,4305,883
5,000
3,7883,377
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2001 2002 2003 2004 2005 2006 2007 June 08 2008 June 09
ICMA Survey
Repos and the repo marketsThe European repo market
16
The European repo marketCollateral analysis
46.4%
18.7%
23.1%
1.6%
4.0%
0.1%
0.7%
5.4%
AAA AA A BBB
<BBB A1P1 A2P2 Unrated
21%
19%
5%
5%
2%
6%5%
24%
13%
1 day 2 days to 1 week
1 week to 1 month >1month to 3 months
>3 months to 6 months > 6 months to 12 months
> 12 months forward-start
open
11%
19%
29%
41%
Direct dealing Triparty
Voice-brokers ATS
• Share of sovereign collateral 81. 2%
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• Introduction
• Repos and the repo markets
• Triparty collateral management
• Collateral Allocation Interface – Central Bank model
AMEDA – Beirut 29 April 2010Agenda
18
Triparty Collateral ManagementHistory
• Bevil, Bressler and Schulman, a US securities firm► Bankruptcy in 1985► Hold-in-custody (HIC) repos► ‘Double-dipping’
– BB&S was using the same piece of collateral for more than one repo
► Loss of over $1bn
• The US Securities and Exchange Commission (SEC) asked US banks Chase Manhattan Bank and Bank of New York to become custodians for repos (“Triparty agents”)
• Triparty was launched in Europe in the early 90’s
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* Acting as representative
Collate
ral
Takers
Broker Dealers
Collate
ral
Giv
ers
1993 … … 2010
Central Banks
Agent lenders
Custodian Bank*Investment ManagersAsset Managers, Money Market Funds, Corporates …
Commercial Banks
Euroclear Triparty client baseIncreasing financing opportunities
Custodian Bank* Hedge Funds
Commercial Banks
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• Legal risk► Market standard legal agreements (e.g. GMRA)
• Risk of default of counterparty► Thorough selection of counterparties
• Market and liquidity risk on securities collateral► Clear definition of acceptable collateral► Imposed diversification through concentration limits► Over-collateralisation of transactions through margins
• Operational risk► Settlement risk► Corporate event risk
Repos and the repo marketsRisks and risk mitigation
Trip
arty
Col
late
ral M
anag
emen
t Triparty C
ollateral Managem
ent
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CONCENTRATIONLIMITS
MARGINPERCENTAGES
Criteria Time to maturity Instrument type Rating Issuer type Country Quotation age Capitalisation Traded volume
Mitigating liquidity and market risks
Interest rate risk Market volatility Foreign exchange risk
Credit risk Country risk Event risk
Liquidity risk
ELIGIBILITY
The outsourcing solution Market and liquidity risk of securities collateral
Risks Risk mitigation
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Triparty Service AgreementOperating ProceduresTerms and Conditions
Eligibility profileConcentration profileMargin percentages
Bi-lateral Contract
Collateralgiver
Collateraltaker
ELIGIBILITY SET 1• Eligible : AAA - A• No concentration• x % haircut
ELIGIBILITY SET 2 •Eligible : AAA - BBB• only y % of BBB • z % haircut
Triparty collateral managementThe Collateral Management outsourcing solution
Neutral agent
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Processing
Bilateral agreementCollatera
l giver
Triparty service agreement
Reporting
• Validation & matching
• Margin
• Settlement
• Custody
• Risk management
• Trade simulation
• Match terms of the transaction
• Verify collateral eligibility
• Daily mark-to-market
• Automatic margin calls
• Automatic substitutions
• Calculate, enter and settle instructions (DVP or FOP)
• Automatic transfer of coupons
Collateral taker
+
Triparty collateral managementOperational risk
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Triparty Collateral Management
Cash exposure of the repo
Value of Securities collateral
Triparty collateral management Mitigating risks of repo transactions
• Daily mark-to-market
• Automatic and unilateral margin calls
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TripartyServices
TRANSACTION
Matching
Selection
Transfer
Valuation
Custody
Reporting
In an efficient,
scalable,
risk-controlled
environment
Collateralgiver
Collateraltaker
The outsourcing solutionMitigating the operational risk
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Collateral GiversCollateral Takers
• Mitigate market risks by implementing collateral criteria in line with your risk appetite and diversification requirements
• Benefit from ‘top notch’ asset protection
• Top quality asset services for securities used as collateral
• Granular reporting for full control over the management of the exposure
• Mitigate market risks by implementing collateral criteria in line with your risk appetite and diversification requirements
• Benefit from ‘top notch’ asset protection
• Top quality asset services for securities used as collateral
• Granular reporting for full control over the management of the exposure
• Optimum usage of collateral resources
• Pool your collateral resources and collateralise across products (repo, securities lending, derivatives,…)
• Easily indentify financing opportunities using our ‘state-of-the-art’ trading simulator
• Gain access to a wide range of counterparties across all market segments of the industry, all within Euroclear Bank
• Optimum usage of collateral resources
• Pool your collateral resources and collateralise across products (repo, securities lending, derivatives,…)
• Easily indentify financing opportunities using our ‘state-of-the-art’ trading simulator
• Gain access to a wide range of counterparties across all market segments of the industry, all within Euroclear Bank
Triparty collateral management Customer’s benefits
• By outsourcing and automating the operational burden related to collateral management, you reduce your back-office workload and operational risk
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• Monitoring collateral position
► Static data (triparty agreements)
► Dynamic data (updated 8 times a day)
• Supporting trading activity
► Funding possibilities
► Customized reports
ReportingTriweb: trade simulation & granular reporting
29
• Rely on a robust and tested collateral management infrastructure
• Outsource non-core activity to a specialised firm
• Control and optimise assets through granular reporting
• Multiply opportunities with the 250+ firms active on Euroclear’s triparty platform
Triparty Collateral ManagementThe Collateral Hub
30
• Introduction
• Repos and the repo markets
• Triparty collateral management
• Collateral Allocation Interface – Central Bank model
AMEDA – Beirut 29 April 2010Agenda
31
Collateral Allocation Interface Central banks taking central stage
Euroclear Bank
Credit Institution
Central Bank
Credit
Collateral Profile
Collateral Management Services
(CMS)
.
AutoSelect
Triweb
In line with Central Bank control requirements
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Credit Institution
Central Bank
Collateral
Outsourcing
Collateral Profile
Reporting
Custody
Valuation
Settlement
Selection
Matching
EvolutionOutsourcing?