3 Industry overviewHeightened risk awareness, demand for operational excellencyIncreased focus on collateralisationPush for standardisation and automation, cost consciousnessChange in regulatory landscape: strong voice of regulatorsDifferent models for different markets and needsBilateral modelTriparty modelNext….?Bilateral Collateral ManagementCCP ClearingTriparty Collateral Management
4 Collateral Management = Risk free? NO. Collateral Management does NOT eliminate the Counterparty RiskIn fact, it transfers the risk intoOperational Risk!Settlement RiskMarket RiskLiquidity Risk
5 Components of Collateral Management? Selection of CollateralValuation of Collateral (mark to market)Margin callsSettlementSubstitutionOptimizationCustody administration (coupon, redemption,…)Custody administration (coupon, redemption,…)
6 How to manage collateral? Bilateral Collateral ManagementIn-house Collateral Management integrated in back-officesDirect contact with counterpartiesTriparty Collateral ManagementUsage of a neutral agent to perform Collateral Management functionsOutsourcingReduce Operational, Settlement, Market and Liquidity risks
7 SWIFT offering in Collateral Management space Bilateral Collateral MessagesSolution scope extension and replacement of existing FIN messages with MXsNew Solution!Triparty Collateral MessagesEstablished suite of FIN messages for E2E processingTriparty Agent
8 How to manage collateral? BilateralTripartySelection of CollateralManual or AutomatedSimple eligibility criteriaAutomatic selectionSophisticated eligibility criteriaMark to MarketDaily, Weekly, or even MonthlyDaily and AutomatedMargin callsOnce a day, Weekly or even MonthlyFully AutomatedSettlementRequired follow upAutomatedSubstitutionOnce a day and “Get before you Give”Unlimited and DVP (Delivery Versus Payment)OptimizationLimitedAutomated across all asset typesCustody administration (coupon, redemption, …)Manual compensationAutomatic compensation
10 Drivers for development alongside regulatory landscape Sept 2008: SWIFT, ISITC, FIX protocol and ISDA / FpML set up Investment Roadmap, agree to provide consistent direction and alignment on messaging developments for the industryOct 2009: SWIFT advises ISDA under the Investment Roadmap, there were ISO developments underway that would benefit from ISDA and SWIFT cooperating on OTC Derivatives / Collateral ManagementNovember 2009: ISDA Collateral Committee publish proposal for standardization supporting the business flows between Collateral Taker/Collateral GiverFebruary 2010: A joint business justification submitted by SWIFT, FIX and ISDA with ISITC sponsorship to the ISO Registration Management Group. Approved by the RMG in April 2010September 2010: Completion of message development
11 How are we trying to help our customers? Data capture and margin call calculation (in-house flows)Agree and process callsIssuance of a margin callNegotiation of margin call(Dis)Agreement of collateralDispute notificationReportingBooking and settlement of collateralNew SWIFT Messaging Solution replacing & faxSubstitutionInterest processing
13 SWIFT bilateral collateral message delivery March 20116 November 2010Vendor Test System4 December 2010Pilot System5 March 2011Collateral Management – Margin call & Substitution -Go-LiveMay 201122 January 201126 February 201121 May 2011Collateral Management – Interest payment & Reporting Go – Live
14 Value creation: Bilateral collateral messages IndustryRiskOperationsElimination of manual processingIncreased transparencyMaximise asset management cross departmentsEnhanced operational control through automation and standardisationScalabilityAbility to focus on exception managementFlexibility to expand other margining models (ie CCP)Compliance with Industry Best Practices and regulatory requirementsSWIFT also provides reach to a wider community over secure network with guaranteed message delivery
16 Triparty Collateral Management offering Straight-through processing connectivityMatching of exposuresSelection of Collateral fully automatedReal time automatic allocation of collateral for new exposureAutomatic allocation (AutoAssign)-every 15 minUnlimited and automatic substitution(DVP)-every 15 minOptimization of collateral-every 15 minCustody administration (coupon, redemption,…)
17 Triparty Collateral Management - Clearstream One single umbrella Collateral Management eXchange (CmaX)Central banks(tenders & discount windows)ReposCCPsSecuritieslendingGC BasketTrading(Euro GC Pooling)Collateral Management(derivatives,structured financing, loans, etc)Collateral receiverCentral banksCommercial banksPrivate banksSupranationalsState agenciesAsset managersCollateral giverBrokers dealersCommercial banksAsset managersInvestment banksBilateral exposureClearstream as triparty collateral agentRe-use, auto allocation, margin calls, auto substitutions, eligibility checks, mark-to-market, reporting
18 Clearstream focus in collateral management products developments STP (straight through processing)TransparencyStandardisationNew asset classesNew distribution channelsPartnerships!
19 Clearstream focus in collateral management developments STP (straight through processing)TransparencyStandardisationNew asset classesNew distribution channelsPartnerships!
20 Trends of the market - need for STP solutions 50100150200250300350400450500550600650700750800850Jul-03Nov-03Mar-04Jul-04Nov-04Mar-05Jul-05Nov-05Mar-06Jul-06Nov-06Mar-07Jul-07Nov-07Mar-08Jul-08Nov-08Mar-09Jul-09Nov-09Mar-10Jul-10bnGSF € TotalBUBA and EGCP €TRI-REPO & TSLS €GSF $ TotalGlobal Securities Financing Totals, Weekly AverageUSD 756 bnper October 2009Euro 518 bn
21 Life-cycle of a Triparty transaction: From matching to settlement Matching of exposureAllocationEligibilitySubstitutionsMark-to-MarketMargin CallsRe-useReportingCollateral GiverCollateral ReceiverExposure Notification (MT527)Exposure Notification (MT527)Matching Status (MT558)Matching Status (MT558)Collateralisation Status (MT558)Collateralisation Status (MT558)Collateral and Exposure Statement(MT569)Collateral and Exposure Statement(MT569)
22 Case study: Triparty for central banks 1BCL domestic counterparty52344Domestic counterparty advises BCL via an MT527 of the amount of collateral to be pledged via TCMSFollowing an internal validation process, BCL communicates the requested collateral amount to CBL as Collateral Receiver andOn behalf of the Collateral Giver using an MT527 i.e. 2 SWIFT messages are sent to CBLCBL confirms the collateralisation status to BCL (MT558) and to the counterparty if required (MT558, CreationOnline, CreationDirect )BCL updates the credit line accordingly
23 Industry standard to STP solution Coverage of full transaction cycle with market StandardsIncreased transparency towards CustomersIncreased downstream STPExcel in operational efficiencyImprove risk managementEasy introduction for new participants: Common way of communicating with triparty agentsA step towards communication interoperability
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