US 20140188691A1

(19) United States (12) Patent Application Publication (10) Pub. No.: US 2014/0188691 A1

BLANK et al. (43) Pub. Date: Jul. 3, 2014

(54) AUTOMATIC COLLATERAL EXCHANGE Publication Classi?cation FOR REHYPOTHECATED COLLATERAL

(5 1) Int. Cl. (71) Applicant: THE BANK OF NEW YORK G06Q 40/04 (2012-01)

MELLON, New York, NY (US) (52) US. Cl. CPC .................................... .. G06Q 40/04 (2013.01)

(72) Inventors: Brian BLANK, Manalapan, N] (U S); USPC .......................................................... .. 705/37 Tejas JHAVERI, Piscataway, N] (U S); (57) ABSTRACT Mahendran GUNASEELAN, Chennai . . (IN); Mariappan GOP AL, Chennai A system for managmg rehypothecated collateral allocatlons

in ?nancial transactions includes processors coupled to memory con?gured to store deal attributes. The processors may execute a collateral allocation module that is operable to receive a request to release a collateral allocation, identify the collateral allocation in one or more deals at a ?rst level, and identify a rehypothecated portion of the collateral allocation in deals at subsequent levels. Where an entirety of the collat

(22) Filed: Jam 2, 2014 eral allocation is identi?ed at each subsequent level, the col lateral allocation module may credit the one or more deals at each subsequent level With net free equity equal to an amount

- - of cash to be exchanged at a prior level of the subsequent Related U's' Apphcatlon Data levels. When a total of the net free equity credit is equal to an

(60) Provisional application No. 61/748,633, ?led on Jan. amount of cash to be exchanged at the ?rst level, the collateral

(IN); Kim LEE, Queens Village, NY (Us)

(21) App1.No.: 14/146,390

3, 2013. allocation module may release the collateral allocation.

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US 2014/0188691A1

AUTOMATIC COLLATERAL EXCHANGE FOR REHYPOTHECATED COLLATERAL

[0001] This application claims the bene?t of priority to Us. Provisional Application Ser. No. 61/748,633, ?led Jan. 3, 2013, the entire contents of which are hereby incorporated by reference.

BACKGROUND

[0002] This application is directed to computer-imple mented systems and methods useful for managing collateral allocations in ?nancial transactions. While aspects of this application may be associated with other types of collateral allocations, the computerized systems and methods for allo cating collateral described herein may be in reference to Repurchase Agreements (Repos), where the collateral is managed by a third party agent (a Tri-Party agent) in Tri Party Repos. [0003] In a Repo, a seller (dealer/borrower/cash receiver) sells securities for cash to a buyer (lender/ cash provider) and agrees to repurchase those securities at a later date for more cash. The Repo rate is the difference between borrowed and paid back cash expressed as a percentage. The buyer typically utilizes Repos to invest cash for an agreed upon duration of time (typically overnight, although the term may vary), and would receive a rate of interest in return for the investment. The seller typically utilizes Repos to ?nance long positions in securities or other assets in the sellers portfolio. [0004] Repos are ?nancial instruments used in money mar kets and capital markets, and are economically similar to a secured loan, with the buyer receiving securities as collateral to protect against default. Virtually any security may be employed in a Repo, including, for example, Treasury or Government bills, corporate and Treasury/Government bonds, stocks/shares, or other securities or ?nancial instru ments. In a Repo, however, the legal title to the securities clearly passes from the seller to the buyer, or investor. Coupons (installment payments that are payable to the owner of the securities), which are paid while the Repo buyer owns the securities are, in fact, usually passed directly onto the Repo seller. This may seem counterintuitive, as the ownership of the collateral technically rests with the buyer during the Repo agreement. It is possible to instead pass on the coupon by altering the cash paid at the end of the agreement, though this is more typical of Sell/Buy Backs. [0005] Although the underlying nature of a Repo transac tion is that of a loan, the terminology differs from that used when talking of loans because the seller does actually repur chase the legal ownership of the securities from the buyer at the end of the agreement. Although the actual effect of the whole transaction is identical to a cash loan, in using the repurchase terminology, the emphasis is placed upon the current legal ownership of the collateral securities by the respective parties. [0006] In a Tri-Party Repo, the collateral is managed by a Tri -Party agent (typically a bank), who may match the details of the trade agreed upon by the buyer and the seller, and assume all of the post trade processing and settlement work. The Tri-Party agent controls the movement of securities, such that the buyers do not actually take delivery of collateralized securities. The Tri-Party agent acts as a custodian for the collateral, and allows the ?ow of collateral and cash between buyers and sellers across one or more deals.

Jul. 3, 2014

[0007] In some Repo agreements, the seller/ dealer may have numerous assets that are being managed by the Tri-Party agent. In these cases, it may be desirable for the Tri-Party agent to allow for the restructuring of the collateral of the deals, so that the seller may free up some assets while placing other agreeable assets in the legal ownership of the buyer, during the deal. Such movements would generally be agreed to by the buyer and the seller when entering the agreement to be managed by the Tri-Party agent. [0008] In some deals, the Tri -Party agent may be authorized to utilize the collateral that has been deposited therewith for their own purposes. Such utilization of the collateral is known as rehypothecation, and may be for any appropriate purpose, including but not limited to backing the transactions and trades made by the Tri-Party agent. In exchange for permit ting rehypothecation, the party who deposits the securities as collateral (e.g., the seller/dealer) may be compensated, such as by receiving a lower cost of borrowing for various deals, or by receiving a fee discount from the Tri-Party agent. [0009] Among other things, what is needed is a system and method for managing collateral in ?nancial transactions, sim plifying and improving the allocations of collateral (e. g., those associated with Tri-Party Repos in a dealers portfolio) while accounting for collateral that has been rehypothecated.

SUMMARY

[0010] Through various embodiments described herein, the system and method of this disclosure enhances the allocations of collateral associated with ?nancial deals. For example, various embodiments provide functions relating to automated exchange of collateral within the deals while satisfying the requirements of the deal, and the preferences of those partici pating in the deal. Further, various embodiments may track positions (e. g., collateral allocations) that have been rehy pothecated into other deals, to facilitate releasing such posi tions. [0011] Various embodiments of this disclosure may be used in conjunction with existing ?nancial services platforms, for example the Bank of New York Mellon s Tri -Party repurchase agreement products (RepoEdge) which allow clients to out source the operational aspects of their collateralized transac tions, and Derivatives Margin Management (DM Edge), which helps clients manage credit risks associated with derivatives transactions by enabling them to accept, monitor and re-transfer collateral. These services, among others such as Repo Margin Management (RM Edge), MarginDirecth, and Derivatives Collateral Net (DCN), may be delivered to clients throughAccessEdgeSM, a real-time, web-based portal. [0012] The operator/manager of the system and method of this disclosure acts as a third-party service provider to the two principals to a trade, and the various functions performed by the system and method provide value-added services which mitigate risk and lead to greater ef?ciencies for both parties. [0013] According to an embodiment, a system for manag ing rehypothecated collateral allocations in one or more ?nancial transactions includes one or more processors coupled to one or more memory elements con?gured to store deal attributes. The one or more processors are operable to execute at least one collateral allocation module. The at least one collateral allocation module when executed, is operable to receive a request to release a collateral allocation, identify the collateral allocation in one or more deals at a ?rst level, and identify a rehypothecated portion of the collateral allo cation in one or more deals at one or more subsequent levels.

US 2014/0188691Al

Where an entirety of the collateral allocation is identi?ed at each subsequent level, the collateral allocation module is operable to credit the one or more deals at each subsequent level with net free equity (N FE) equal to an amount of cash to be exchanged at a prior level of the one or more subsequent levels. When a total of the net free equity credit is equal to an amount of cash to be exchanged at the ?rst level, the collateral allocation module is operable to release the collateral alloca tion. [0014] According to another embodiment, a computer implemented method for managing rehypothecated collateral allocations in one or more ?nancial transactions includes receiving, at one or more processors coupled to one or more memory elements con?gured to store deal attributes, a request to release a collateral allocation. The method also includes identifying, at the one or more processors, the col lateral allocation in one or more deals at a ?rst level. The method also includes identifying, at the one or more proces sors, a rehypothecated portion of the collateral allocation in one or more deals at one or more subsequent levels. Where an entirety of the collateral allocation is identi?ed at each sub sequent level, the method additionally includes crediting, via the one or more processors, the one or more deals at each subsequent level with net free equity (NFE) equal to an amount of cash to be exchanged at a prior level of the one or more subsequent levels. When a total of the net free equity credit is equal to an amount of cash to be exchanged at the ?rst level, the method further includes releasing, via the one or more processors, the collateral allocation. [0015] The system and method of this disclosure provides various capabilities as discussed more fully in the detailed description below.

BRIEF DISCUSSION OF THE DRAWINGS

[0016] FIG. 1 provides a functional block diagram of an embodiment of a computer-implemented and networked sys tem for collateral management; [0017] FIG. 2 schematically illustrates an embodiment of a release process associated with collateral allocations; [0018] FIG. 3 schematically illustrates an embodiment of a release process associated with releasing rehypothecated FED collateral; [0019] FIG. 4 schematically illustrates an embodiment of a Net Free Equity credit process for rehypothecated collateral; [0020] FIG. 5 illustrates an embodiment of a user interface con?gured for deleting dealer positions; [0021] FIG. 6 schematically illustrates an embodiment of a release process associated with releasing rehypothecated DTC collateral; [0022] FIG. 7 schematically illustrates an embodiment of a release process associated with internal position movements; [0023] FIG. 8 schematically illustrates an embodiment of a cancellation request process; [0024] FIG. 9 illustrates an embodiment of a user interface con?gured to identify various release requests; [0025] FIG. 10 illustrates an embodiment of a user interface con?gured to display various release requests; [0026] FIG. 11 illustrates an embodiment of a user interface con?gured to display a summary of legs associated with rehypothecated transactions. [0027] FIG. 12 illustrates an embodiment of a user interface con?gured to display details of a leg associated with a rehy pothecated transaction; and

Jul. 3, 2014

[0028] FIG. 13 illustrates an embodiment of a user interface con?gured to display release requests for selection of repro cessing thereof.

DETAILED DESCRIPTION

[0029] In the discussion of various embodiments and aspects of the system and method of this disclosure, examples of a processor may include any one or more of, for instance, a personal computer, portable computer, personal digital assistant (PDA), workstation, or other processor-driven device, and examples of network may include, for example, a private network, the Internet, or other known network types, including both wired and wireless networks. [0030] Those with skill in the art will appreciate that the inventive concept described herein may work with various system con?gurations. In addition, various embodiments of this disclosure may be made in hardware, ?rmware, software, or any suitable combination thereof. Aspects of this disclo sure may also be implemented as instructions stored on a machine-readable medium, which may be read and executed by one or more processors. A machine-readable medium may include any mechanism for storing or transmitting informa tion in a form readable by a machine (e.g., a computing device, or a signal transmission medium), and may include a machine-readable transmission medium or a machine-read able storage medium. For example, a machine-readable stor age medium may include read only memory, random access memory, magnetic disk storage media, optical storage media, ?ash memory devices, and others. Further, ?rmware, soft ware, routines, or instructions may be described herein in terms of speci?c exemplary embodiments that may perform certain actions. However, it will be apparent that such descriptions are merely for convenience and that such actions in fact result from computing devices, processors, controllers, or other devices executing the ?rmware, software, routines, or instructions. [0031] Described herein is an exemplary algorithm which may be implemented through computer software running in a processor to determine optimal collateral allocations based on user-selected criteria. This algorithm is not intended to be limiting, but is merely provided to describe one way of accomplishing the functions associated with determining optimal collateral allocations. [0032] In the discussion of various embodiments and aspects of the system and method of this disclosure, examples of trading parties include, but are not limited to, broker dealers, institutional investors, and hedge fund managers. [0033] In various embodiments, a web-based collateral management system or platform links dealers with investors to conduct collateral transactions in a safe, ef?cient, and reliable way. Online dealers and investors can manage collat eral among a diverse range of instruments, including Tri Party repo agreements in all major currencies, securities lend ing transactions, municipal deposits, bank loans, derivatives transactions, letters of credit, and structured trades, for example. The system may be managed by the Tri-Party agent, and may additionally provide, for example, daily mark-to market valuations, haircuts/margins, and concentration limits (i.e., maintain percentages of market capitalization, dollar amount limits for a particular security, or a percentage of the portfolio in a particular security, for example), as well as manage, track, and settle collateral transactions across global capital markets by working collaboratively with clients to provide collateral transparency. The enhanced collateral allo