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Triparty Collateral Management The efficient outsourced solution for managing and securing repo transactions. AMEDA meeting Beirut – 29 April 2010 Bernard Ferran Regional Head, Relationship Management bernard.ferran@euroclear.com. AMEDA – Beirut 29 April 2010 Agenda. Introduction

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Triparty Collateral ManagementThe efficient outsourced solution for managing and securing repo transactions

AMEDA meeting

Beirut – 29 April 2010

Bernard Ferran

Regional Head, Relationship Management

bernard.ferran@euroclear.com

ameda beirut 29 april 2010 agenda
AMEDA – Beirut 29 April 2010Agenda
  • Introduction
  • Repos and the repo markets
  • Triparty collateral management
  • Collateral Allocation Interface – Central Bank model
market turmoil the key milestones
Market turmoilThe key milestones

Concerns about the valuation of structured products

A number of investment funds freeze redemptions

Emergency rescue

of Bear Stearns

Lehman Brothers

bankruptcy

Leverage crisis and

credit crunch turns

into a full blown insolvency problem

15 Sep 2008

13 March 2008

9 Aug 2007

  • Drying-up of inter-bank market
  • Absence of term financing
  • Shortage of USD financing in Europe
  • Massive de-leveraging
  • 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
slide4

Market turmoil

Eurepo/Euribor 3M

Problems at

Northern Rock

Rescue of

Bear Stearns

Collapseof

Lehman Brothers

Problems at Sachsen LB and West LB

Citi closes 7 SIVs

Problems at IKB

Bear Stearns shuts down two HFs

Aug 23 – ECB Long Term Reserve Operation

March 11 -Other CB coordinated effort announcing $200bn of new emergency lending for banks

Sep 12 – ECB Long Term Reserve Operation

Dillon Read HF shut down by UBS

Dec 12 - concerted CB action (FED, ECB, BOE, SNB) – TAF auction

a major crisis across all market segments
A major crisisAcross all market segments

Securities lending

Repo

Central bank credit/liquidity

Unsecured

Money markets

Cash driven

Routine

(e.g. tenders, …)

Securities collateral

No collateral !

Securities driven

Contingency

Cash collateral

  • Unsecured market dried-up
  • Term market disappeared
  • Concerns of final Beneficial Owners on certain cash reinvestment programs
  • No more term financing
  • Secured money market
  • CCP GC baskets
  • Massive intermediation
  • Contingency schemes

+

-

-

-

what investors focus on priorities
What investors focus on ?Priorities
  • By order or priority, the money-markets investors will focus on
    • Credit/counterparty risk
    • Liquidity risk
    • Return

Need to find a secured financing solution The repo markets

from unsecured to secured financing the club is growing
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

ameda beirut 29 april 2010 agenda8
AMEDA – Beirut 29 April 2010Agenda
  • Introduction
  • Repos and the repo markets
  • Triparty collateral management
  • Collateral Allocation Interface – Central Bank model
repos and the repo markets an introduction
Repos and the repo marketsAn introduction
  • 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 priceequal 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 markets an introduction10
Repos and the repo marketsAn introduction
  • 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 markets the mechanics of a repo trade
Repos and the repo marketsThe mechanics of a repo trade

A Dutch Bank A is trading a one-month repo with Spanish Bank B at a rate of 0.885%

Dutch

Bank A

Spanish

Bank B

€10,000,000 of DE0001134492

D-day

€ 12,157,315.07

Dutch

Bank A

Spanish

Bank B

€10,000,000 of DE0001134492

D-day

+ 1 month

€ 12,166,579.96

repos and the repo markets the functions of a repo desk
Repos and the repo marketsThe functions of a repo desk
  • 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 markets risks and risk mitigation
Repos and the repo marketsRisks and risk mitigation
  • 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
the european repo market collateral analysis
The European repo marketCollateral analysis
  • Share of sovereign collateral 81. 2%
ameda beirut 29 april 2010 agenda17
AMEDA – Beirut 29 April 2010Agenda
  • Introduction
  • Repos and the repo markets
  • Triparty collateral management
  • Collateral Allocation Interface – Central Bank model
triparty collateral management history
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
euroclear triparty client base increasing financing opportunities
Euroclear Triparty client baseIncreasing financing opportunities

Custodian Bank*

Investment Managers

Asset Managers, Money Market Funds, Corporates …

Collateral

Takers

Agent lenders

Commercial Banks

Central Banks

Custodian Bank* Hedge Funds

Collateral

Givers

Commercial Banks

Broker Dealers

1993 …

… 2010

* Acting as representative

repos and the repo markets risks and risk mitigation20
Repos and the repo marketsRisks and risk mitigation
  • 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

Triparty Collateral Management

Triparty Collateral Management

the outsourcing solution market and liquidity risk of securities collateral

Interest rate risk

  • Market volatility
  • Foreign exchange risk
  • Credit risk
  • Country risk
  • Event risk
  • Liquidity risk
The outsourcing solutionMarket and liquidity risk of securities collateral

Risks

Risk mitigation

Criteria

  • Time to maturity
  • Instrument type

ELIGIBILITY

  • Rating
  • Issuer type
  • Country

CONCENTRATION

LIMITS

  • Quotation age
  • Capitalisation
  • Traded volume

MARGIN

PERCENTAGES

Mitigating liquidity and market risks

triparty collateral management the collateral management outsourcing solution
Triparty collateral managementThe Collateral Management outsourcing solution

Bi-lateral Contract

Triparty Service Agreement

Operating Procedures

Terms and Conditions

Eligibility profile

Concentration profile

Margin percentages

Collateral

giver

Collateral

taker

  • ELIGIBILITY SET 1
  • Eligible : AAA - A
  • No concentration
  • x % haircut
  • ELIGIBILITY SET 2
  • Eligible : AAA - BBB
  • only y % of BBB
  • z % haircut

Neutral agent

triparty collateral management operational risk
Triparty collateral managementOperational risk

Bilateral agreement

Collateral taker

Collateral giver

+

Triparty service agreement

Processing

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
triparty collateral management mitigating risks of repo transactions
Triparty collateral managementMitigating risks of repo transactions
  • Daily mark-to-market
  • Automatic and unilateral margin calls

Cash exposure

of the repo

Value of

Securities collateral

Triparty Collateral Management

the outsourcing solution mitigating the operational risk
The outsourcing solutionMitigating the operational risk

TRANSACTION

Collateral

taker

Collateral

giver

Triparty

Services

Matching

Selection

Transfer

Valuation

In an efficient,

scalable,

risk-controlled

environment

Custody

Reporting

triparty collateral management customer s benefits
Triparty collateral managementCustomer’s benefits

Collateral Takers

Collateral Givers

  • By outsourcing and automatingthe operational burden related to collateral management, you reduce your back-office workload and operational risk
  • 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
  • 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 servicesfor securities used as collateral
  • Granular reporting for full control over the management of the exposure
reporting triweb trade simulation granular reporting
ReportingTriweb: trade simulation & granular reporting
  • Monitoring collateral position
    • Static data (triparty agreements)
    • Dynamic data (updated 8 times a day)
  • Supporting trading activity
    • Funding possibilities
    • Customized reports
triparty collateral management the collateral hub
Triparty Collateral ManagementThe Collateral Hub
  • 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
ameda beirut 29 april 2010 agenda30
AMEDA – Beirut 29 April 2010Agenda
  • Introduction
  • Repos and the repo markets
  • Triparty collateral management
  • Collateral Allocation Interface – Central Bank model
collateral allocation interface central banks taking central stage

Credit

Credit Institution

Central Bank

Collateral Profile

Collateral Management Services (CMS)

Euroclear Bank

In line with Central Bank control requirements

Collateral Allocation Interface Central banks taking central stage

.

AutoSelect

Triweb

evolution outsourcing

Collateral

Credit Institution

Central Bank

Collateral Profile

Reporting

Custody

Valuation

Settlement

Selection

Matching

EvolutionOutsourcing?

Outsourcing