OCC: Use our data for significant savings on equity collateral
01 November 2019 Chicago
Image: Shutterstock
The Options Clearing Corporation’s (OCC) clearing members are starting to leverage daily datafiles on the value of securities eligible to be used as collateral to optimise their pledge operations and “generate significant savings,” according to the clearinghouse.
The Chicago-based clearinghouse has offered the valuation methodology called ‘Collateral in Margins’ since December 2009 to promote optimisation but it said members have only begun to focus on them as a cost-saving resource in the past two years.
Matt Wolfe, OCC’s vice president of business development, said that, today, there are only a handful of firms taking advantage of this methodology to reduce their collateral contributions and that most are doing so manually.
“There are many more firms and vendors currently working on projects to automate this process,” he added.
In a recent blog post on the new trend of leveraging the datafiles, Wolfe said: “This optimisation may generate significant savings. Anecdotal evidence indicates that this practice may allow clearing members to meet their margin requirements by posting collateral with significantly less market value, in some cases, tens of millions of dollars less.”
Later in the post, Wolfe cited operational challenges for pledging equities as collateral as one of the top three hurdles standing between OCC’s clearing members and optimisation of their equity collateral processes.
On the difficulties facing clearing members in their collateral business, Wolfe said that many clearing members still use a manual process when communicating with the Depository Trust Company and OCC, even though both offer a real-time automated link communicating new pledges and released pledge positions.
The post also outlined that firms using a manual process tend to optimise pledges for operational ease rather than collateral efficiency, while firms and vendors that automate this process tend to improve the velocity of their collateral movements and the efficiency of their deposits.
The other two challenges related to gathering a complete inventory of equities they have available for deposit and determining their internal cost model for using collateral.
Wolfe noted that in many instances, firms that addressed some or all these challenges found significant savings from their first optimisation and usually were able to maintain that efficiency with minor adjustments every three or four weeks.
“We typically hold approximately $120 billion in collateral,” Wolfe explained. “Crucially, at least 70 percent of this is in equities. Since equities and equity derivatives are correlated, we're able to analyse this correlation and provide a more accurate risk assessment than if we used a standard collateral schedule.”
Wolfe explained that the majority of clearinghouses apply standardised haircuts to collateral, with only a few others offering a “more dynamic valuation”.
In order to further support its clearing member firms, the OCC is developing several internal systems enhancements to support its clearing member firms' operational efficiency.
The developments will encompass collateral processing with greater automation of cash and government security transaction, and acceptance of additional types of eligible collateral, Wolfe explained.
Elsewhere at OCC, Wolfe said the clearinghouse is exploring ways to improve the transparency of collateral haircuts and provide additional application programming interfaces to simulate portfolios of derivatives and collateral.
The Chicago-based clearinghouse has offered the valuation methodology called ‘Collateral in Margins’ since December 2009 to promote optimisation but it said members have only begun to focus on them as a cost-saving resource in the past two years.
Matt Wolfe, OCC’s vice president of business development, said that, today, there are only a handful of firms taking advantage of this methodology to reduce their collateral contributions and that most are doing so manually.
“There are many more firms and vendors currently working on projects to automate this process,” he added.
In a recent blog post on the new trend of leveraging the datafiles, Wolfe said: “This optimisation may generate significant savings. Anecdotal evidence indicates that this practice may allow clearing members to meet their margin requirements by posting collateral with significantly less market value, in some cases, tens of millions of dollars less.”
Later in the post, Wolfe cited operational challenges for pledging equities as collateral as one of the top three hurdles standing between OCC’s clearing members and optimisation of their equity collateral processes.
On the difficulties facing clearing members in their collateral business, Wolfe said that many clearing members still use a manual process when communicating with the Depository Trust Company and OCC, even though both offer a real-time automated link communicating new pledges and released pledge positions.
The post also outlined that firms using a manual process tend to optimise pledges for operational ease rather than collateral efficiency, while firms and vendors that automate this process tend to improve the velocity of their collateral movements and the efficiency of their deposits.
The other two challenges related to gathering a complete inventory of equities they have available for deposit and determining their internal cost model for using collateral.
Wolfe noted that in many instances, firms that addressed some or all these challenges found significant savings from their first optimisation and usually were able to maintain that efficiency with minor adjustments every three or four weeks.
“We typically hold approximately $120 billion in collateral,” Wolfe explained. “Crucially, at least 70 percent of this is in equities. Since equities and equity derivatives are correlated, we're able to analyse this correlation and provide a more accurate risk assessment than if we used a standard collateral schedule.”
Wolfe explained that the majority of clearinghouses apply standardised haircuts to collateral, with only a few others offering a “more dynamic valuation”.
In order to further support its clearing member firms, the OCC is developing several internal systems enhancements to support its clearing member firms' operational efficiency.
The developments will encompass collateral processing with greater automation of cash and government security transaction, and acceptance of additional types of eligible collateral, Wolfe explained.
Elsewhere at OCC, Wolfe said the clearinghouse is exploring ways to improve the transparency of collateral haircuts and provide additional application programming interfaces to simulate portfolios of derivatives and collateral.
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