Clash of the assets
07 June 2016
CCPs are able to bring together the demand and supply for collateral management and liquidity. Eurex Clearing’s Gerard Denham explains
Image: Shutterstock
The financial markets are undergoing major changes. Liquidity and leverage are at the core of the regulatory challenges facing every market participant. The impact on both the sell side and the buy side is evident. Increases in margin and collateral requirements, together with higher capital charges, are forcing banks and market participants to embrace alternative solutions for trading in order to maintain an effective level of cost management—there are higher costs for doing business on a bilateral basis.
Eurex Clearing, Deutsche Börse’s central counterparty (CCP) service provider, is uniquely positioned as the only CCP providing a fully integrated service across asset classes. An integrated CCP service delivers capital, collateral and operational efficiencies to its clients. This is achieved by utilising services for both listed instruments and business conducted on an over-the-counter (OTC) basis for derivatives and securities finance transactions. This results in:
Netting across products and direct member models for buy-side participants, allowing for capital efficiency;
Clients enhancing their collateral management processes to benefit from collateral efficiency by accommodating a wide eligibility of collateral and functionality to assist with collateral transformation; and
Innovating and enhancing a portfolio risk management system across all asset classes and product types, providing margin efficiency.
Extensive capital requirements are in place for capital ratios, exposure and risk weight calculations. Additionally, there is the introduction of CVA VaR capital charges and the framework for the leverage ratio. The demand for collateral will increase, which will affect the supply and liquidity of the marketplace.
This is driven by margin requirements on OTC derivatives and haircut floors for securities finance transactions, the limited ability to reuse and rehypothecate collateral, and stricter standards on eligible collateral, all putting pressure on the market’s ability to finance assets, in particular those classified as high-quality liquid assets.
Advanced CCP services can generate capital, collateral and margin efficiencies for market participants. Direct clearing models for derivative and securities finance transactions help to reduce risk-weighted asset and capital requirements. Eurex Clearing has already innovated in the securities lending market with its specific lender licence—this has also been replicated for cleared Eurex Repo/GC Pooling transactions utilising the Eurex Repo marketplace. Further enhancements to these models are essential for the market to reduce trade exposures.
The recently announced ISA Direct model combines elements of direct clearing membership and the traditional service relationship in client clearing, tailored specifically for the buy side. The principal client relationship moves from the existing clearing member directly to the CCP, with the clearing member acting as the clearing agent, which will provide mandatory core and optional service functions.
The service will initially be launched in this summer for OTC interest rate swaps, as well as repo transactions offered under the Select Finance service in cooperation with Eurex Repo as a trading venue. Listed derivatives and securities lending transactions are to follow.
Cross-product netting models help to reduce capital requirements and collateral demand. Eurex Clearing Prisma, a portfolio-based margin approach, creates efficiencies for margining, balance sheets and for default fund contributions. Integrated CCP collateral models across all business lines help to increase collateral availability, liquidity and fluidity. A CCP solution for collateral transformation assists the market with raising eligible collateral while also lowering financing costs due to reduced counterparty risks and exposures through a CCP.
The key focus of Eurex Clearing has been to integrate CCP solutions across all product lines by linking together derivatives and securities finance. By being able to link the flow of both cash and securities across products and platforms, the CCP is able to bring together the demand and the supply for collateral management and liquidity that is so crucial for the marketplace. This is achieved by the integration of our CCP cleared services for derivatives, securities lending, repo and GC Pooling.
One example of this integrated service is Eurex Clearing’s CCP service for securities lending, the Lending CCP. It maintains existing trading relationships and maintains the choice and flexibility of collateral, while a fully integrated operational process has been incorporated to support the move to centrally cleared securities finance transactions.
Eurex Clearing, Deutsche Börse’s central counterparty (CCP) service provider, is uniquely positioned as the only CCP providing a fully integrated service across asset classes. An integrated CCP service delivers capital, collateral and operational efficiencies to its clients. This is achieved by utilising services for both listed instruments and business conducted on an over-the-counter (OTC) basis for derivatives and securities finance transactions. This results in:
Netting across products and direct member models for buy-side participants, allowing for capital efficiency;
Clients enhancing their collateral management processes to benefit from collateral efficiency by accommodating a wide eligibility of collateral and functionality to assist with collateral transformation; and
Innovating and enhancing a portfolio risk management system across all asset classes and product types, providing margin efficiency.
Extensive capital requirements are in place for capital ratios, exposure and risk weight calculations. Additionally, there is the introduction of CVA VaR capital charges and the framework for the leverage ratio. The demand for collateral will increase, which will affect the supply and liquidity of the marketplace.
This is driven by margin requirements on OTC derivatives and haircut floors for securities finance transactions, the limited ability to reuse and rehypothecate collateral, and stricter standards on eligible collateral, all putting pressure on the market’s ability to finance assets, in particular those classified as high-quality liquid assets.
Advanced CCP services can generate capital, collateral and margin efficiencies for market participants. Direct clearing models for derivative and securities finance transactions help to reduce risk-weighted asset and capital requirements. Eurex Clearing has already innovated in the securities lending market with its specific lender licence—this has also been replicated for cleared Eurex Repo/GC Pooling transactions utilising the Eurex Repo marketplace. Further enhancements to these models are essential for the market to reduce trade exposures.
The recently announced ISA Direct model combines elements of direct clearing membership and the traditional service relationship in client clearing, tailored specifically for the buy side. The principal client relationship moves from the existing clearing member directly to the CCP, with the clearing member acting as the clearing agent, which will provide mandatory core and optional service functions.
The service will initially be launched in this summer for OTC interest rate swaps, as well as repo transactions offered under the Select Finance service in cooperation with Eurex Repo as a trading venue. Listed derivatives and securities lending transactions are to follow.
Cross-product netting models help to reduce capital requirements and collateral demand. Eurex Clearing Prisma, a portfolio-based margin approach, creates efficiencies for margining, balance sheets and for default fund contributions. Integrated CCP collateral models across all business lines help to increase collateral availability, liquidity and fluidity. A CCP solution for collateral transformation assists the market with raising eligible collateral while also lowering financing costs due to reduced counterparty risks and exposures through a CCP.
The key focus of Eurex Clearing has been to integrate CCP solutions across all product lines by linking together derivatives and securities finance. By being able to link the flow of both cash and securities across products and platforms, the CCP is able to bring together the demand and the supply for collateral management and liquidity that is so crucial for the marketplace. This is achieved by the integration of our CCP cleared services for derivatives, securities lending, repo and GC Pooling.
One example of this integrated service is Eurex Clearing’s CCP service for securities lending, the Lending CCP. It maintains existing trading relationships and maintains the choice and flexibility of collateral, while a fully integrated operational process has been incorporated to support the move to centrally cleared securities finance transactions.
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