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Cleared Term DBV 23 July 2013. Key dates. February 2014: Market testing on an end-to-end LCH.Clearnet /CREST test platform March 17 2014: Euroclear UK & Ireland launch underpinning settlement changes to the CREST system. April 2014:

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Cleared Term DBV 23 July 2013

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Cleared Term DBV

23 July 2013

key dates
Key dates
  • February 2014:
    • Market testing on an end-to-end LCH.Clearnet/CREST test platform
  • March 17 2014:
    • Euroclear UK & Ireland launch underpinning settlement changes to the CREST system.
  • April 2014:
    • LCH.Clearnet launch their new Term £GC service and start the transition from the current Sterling GC service.
  • Term DBV: a perspective from the Bank’s front office
    • Andrew Hauser: Head of Sterling Markets Division
  • The case for change
    • Toby Davies: Head of Market Services Division
  • Key features of the new Cleared Term DBV service
    • CREST system enhancements: David Nicholas, Euroclear UK & Ireland.
    • New Term £GC product: Nigel Bradley, LCH.Clearnet.
  • Sub-group update, and member actions required
    • Ian Fox: Chair, MMLG sub-group for Cleared Term DBV.
  • Q&A (Panel session)
  • Closing remarks
    • Ian Mair: Chair, London Money Market Association

Cleared Term DBV

23 July 2013


Term DBV: a perspective from the Bank’s front office

Andrew Hauser

Head, Sterling Markets Division

Chair of Money Market Liaison Group

Chair of Securities Lending and Repo Committee

secured flows now dwarf unsecured
...secured flows now dwarf unsecured

Average daily turnover in sterling money market (Nov 2012)

gradual shift to secured a global trend
Gradual shift to secured: a global trend

Secured transactions as share of total turnover

improving market resilience
Improving market resilience
  • Repo reduces (though not eliminates!) counterparty risk
  • But highly collateralised world increases macroprudential risks – some of which crystallised during the financial crisis
  • Global response overseen by Financial Stability Board:
    • Main focus on ‘procyclicality’
    • But mitigating operational risk also important
  • UK challenges not on same scale as eg US triparty - but mismatch between daily DBV settlement unwind and term of underlying deals does pose operational and liquidity risks
the bank s front office interests
The Bank’s front office interests
  • Broad interest in stability of the market: key transmission channel for monetary policy
  • DBV central to Bank’s own operations:
    • Peak daily value during crisis = £85bn
    • From July 2011, Bank counterparties have had option of using Term DBV in OMOs and OSFs...
    • ...and we made it clear that we were ‘minded to discontinue use of Rolling Overnight DBV’
  • MMLG oversight
the system may be safer but what s in it for me
“The system may be safer, but what’s in it for me?”
  • Safer system benefits everyone, but also...
    • Settlement costs and exposures(Toby Davies will cover)
    • Margin costs (LCH.Clearnet will cover)
the system may be safer but what s in it for me1
“The system may be safer, but what’s in it for me?”
  • Safer system benefits everyone, but also...
    • Settlement costs and exposures(Toby Davies will cover)
    • Margin costs (LCH.Clearnet will cover)
  • Front office engagement crucial to success of the exercise
    • Good practice guidelines (Toby/Ian will cover)

Cleared Term DBV

23 July 2013

the case for change

The case for change

Toby Davies

Head of Market Services Division

23 July 2013

current dbv mechanism
Current DBV mechanism
  • Current overnight DBV model is tried-and-tested
    • low cost easy way of delivering market-defined baskets of GC
    • no substitutions or mark-to-market needed because collateral is returned every morning
    • reliable
  • But it masks hidden issues
    • an inefficient and risky churn of daily return and reissue
    • dependency on provision of central bank liquidity through auto collateralised repo to fund intraday positions
  • In the event of a counterparty or system-wide outage intraday between morning unwind and afternoon re-input:
    • DBV counterparties would be left holding the ‘wrong’ asset
    • counterparties would be required to manage liquidity dislocation

DBV counterparties and their CREST settlement banks would be left with credit exposures

    • the Bank would be left with intra-day liquidity extension to settlement banks that might need to be converted into overnight facilities
  • The values are substantial
11 november 2011
11 November 2011
  • Severe SWIFT outage on 11 November 2011 meant many of the day’s DBVs (including LCH’s) could not be submitted until very late in the day
  • DBV value input after the outage was resolved was £159bn
  • Outstanding IDL (a large proportion of which is normally repaid automatically in afternoon DBVs) was at £82bn at the point of failure
the challenge
The challenge
  • The Bank has been exercised by the risks for many years
  • Objective is to align the settlement arrangements with the underlying economic terms of the repo
    • not to change the fundamental form of the trade
  • The challenge is to reduce risks while retaining the benefits of the DBV basket collateral mechanism.
  • The introduction of Term DBV within CREST in 2011 provided an underlying mechanism
    • but could not gain sufficient traction without being cleared through LCH.C which accounts for ~40% of DBV value settled.
  • From reduction in daily cash and collateral settlement flow
    • in aggregate, less credit needed for settlement
    • reduced position management ahead of DBV settlement window
    • reduced reliance on central bank liquidity provision
  • Tail risk
    • reduced risk from operational interruption
      • only overnight and new business exposed to intraday interruption
      • reduced potential dislocation of liquidity
good market practice is essential
Good market practice is essential
  • collateral giver
    • to maintain pool of eligible collateral to feed mark-to-market and substitutions
  • collateral taker
    • to ensure substitutions do not fail by keeping received collateral available for substitution and return
    • CREST is able to manage substitutions because it recognises a closed loop of collateral given/received in DBV. This breaks down if you deliver away received stock other than as DBV.
    • Two approaches:
      • Hold stock in segregated account
      • Careful position management
  • Focus today is LCH introduction of a cleared Term GC product.
  • The issue is to align the settlement process with the economic terms of the repo
    • without fundamentally changing the latter
  • The objective is to reduce potentially significant risk in the event of a counterparty or system-wide outage that prevents DBV settlement
  • The change will need to be carefully coordinated.

Cleared Term DBV

23 July 2013

functional overview
Functional Overview
  • Input and selection
    • Uses existing DBV algorithm (basket based and size first)
    • Return date (1 day – 2 years)
    • Settling between 3:00pm and 4:10pm
  • Mark to Market
    • Overnight: identifies DBVs that are incorrectly collateralised (based on closing price)
    • Intraday: Generates transaction to rebalance collateral levels to cover cash value of transaction
    • Generated (in full or partial) if stock is available
    • Links across multiple transaction legs (even where position is flat)
functional overview1
Functional Overview
  • Substitutions (Eligibility & Giver Recall)
    • Automatic recall based on Corporate Action or settlement need
    • Delivery versus delivery
    • Runs throughout the day to support settlement fails
    • Recall/substitution possible over a wide chain/array of transactions
  • Adjustments
    • Ability to adjust the value of collateral sought, consideration or length of term during the term of the DBV
  • Interest Calculation
    • Interest accrued daily for length of term (TDI)
recall substitution
Recall Substitution
  • Simple Substitution (Bilateral model)
  • Day 1: delivers £100m DBV (UBG) 7 day term
  • Day 2: Party A delivers £25m gilt 1 to Party C

DBV £100m UBG

Party A

Party B

£50m Gilt 1

£50m Gilt 2

7 day term

£100m Gilt 3

Party A

Party B

Sub (TDG) £25m Gilt 3

£75m Gilt 3

£25m Gilt 1

£50m Gilt 2

£25m Gilt 3

Sub (TDG) £25m Gilt 1

DEL £25m

Gilt 1

Party C

recall substitution1
Recall Substitution
  • Complex Substitution
    • CCP is less vulnerable to subs fails given the large number of counterparty holdings

TDG £5m Gilt 2

Mbr F

Mbr H

DEL £30m

Mbr X

Mbr A

TDG £5m Gilt 1

TDG £10m Gilt 2

Gilt 1

TDG £30m Gilt 2

TDG £10m Gilt 1

TDG £30m Gilt 1

Mbr B

Mbr G

TDG £20m Gilt 2


Mbr C

TDG £20m Gilt 1

Mbr H

Mbr D

Mbr I

Mbr E

cleared term dbv enhancements
Cleared Term DBV Enhancements
  • Direct input of Term DBVs and Term DBV Adjustments from LCH.C
  • Support settlement of Giver Recall Substitutions, Term DBV Maturity Returns and Own Account Transfers alongside DBV settlement in order to satisfy settlement efficiency/minimise fails
  • Support early closing of a open term DBV via LCH
  • Substitutions triggered by Term DBV Amendment (during DBV settlement)
  • Removal of diary time slicing (full availability of substitutions)
  • Support of negative interest rates
market practice
Market Practice
  • Successful operation of substitution functionality – dependant on collateral being maintained within collateral arrangements (no onward Delivery of Collateral other than by Term DBV)
  • Substitution not possible where collateral moved outside collateral arrangements
  • No enforcement tools
    • No Settlement Discipline regime
    • Requires adherence to good market practice
  • Options to avoid unintentional delivery of collateral outside of collateral arrangements:
    • Account Segregation - Main Trading and Collateral Accounts
    • Single Account – inventory management challenge
account segregation
Account Segregation
  • DBVs ‘Collateral Account’ separate from Main Trading Account
  • Advantages:
    • no possibility of unintentional delivery of collateral outside of collateral arrangements
    • Clear view of Available Balance (securities available to trade/deliver)
  • Disadvantages
    • Account rebalancing necessary (top up/draw downs)
      • Own Account Transfers in DBV settlement window
      • Movements in individual lines of securities
single account
Single Account
  • Single account for all activity (DBVs and Main Trading Account)
  • Advantages:
    • Maximum flexibility
  • Disadvantages
    • Requires accurate management of positions
      • Clear view of what is held as collateral
      • What is available for delivery
  • To support a single account:
    • Addition of ‘non Collateral Balance’ to CREST GUI and FT DEX messages (derived) – visibility of unencumbered balance
      • Available Balance – Collateral Balances
dbv reporting tools
DBV Reporting Tools
  • To support the market:
  • Report per participant
    • Highlighting any inadvertent breaches of good practice
    • Nil Return Report – confirming non-breaches
  • Monthly summary reports
    • No participant details
    • Persistent breaches – highlighted to participants individually
testing availability
Testing Availability
  • Test Environment available for testing Term DBV functionality
  • Block Booking – Nov/Dec 2013
  • No charge for testing during this period

Cleared Term DBV

23 July 2013

term gc product overview

Term £GC Product Overview

Bank of England

23 July 2013

term gc overview
Term £GC Overview

Sterling GC

Term £GC


Term £GC

Product Definition

Sterling GC

Product Definition

Features of cleared product

Settlement mechanism



  • Term £GC Key Benefits
  • Reduced operational risk and settlement credit needs due to the elimination of the requirement for daily return of cash and collateral compared to the current Sterling GC product.
  • Introduction of margin offsets between trades relating to specific bonds e.g. the existing cleared Gilts market, and allocations resulting from Term £GC trades.

TDBV Settlement

DBV Settlement

term gc overview1
Term £GC Overview
  • Sterling denominated repo trades based on the CREST Unstripped British Government (“UBG”) Delivery by Value (“DBV”) class.
  • Term £GC will be made available for trading via electronic trading platforms and anonymous trading will be available.
  • Bilateral and voice brokered trades will also be supported.
  • Overnight trades and term trades (up to 374 day term) accepted.
  • Settlement, using Euroclear UK & Ireland’s (“EUI”) Term DBV (“TDBV”) settlement platform, is
  • instructed by RepoClear and automatically matched via the Direct Input facility.
  • Collateral allocated as part of a Term £GC trade can be substituted in the same manner as any
  • other collateral utilised within the TDBV environment.
  • Participants’ positions will be maintained in CREST utilising standard Mark to Market functionality
  • augmented with LCH.Clearnet Risk management processes.
trade registration
Trade Registration
    • Trade registration supported from 07.00 to 18.00 (all times are London time)
    • Cut off for registration of trades for same day settlement: 14.30
  • Fixed term trades
  • Fixed repo rate (positive, negative or zero)
  • Cash fill basis (defined in GBP)
    • Based on EUI’s definition of Unstripped British Gilt (“UBG”) class
      • Consistent with Sterling GC
      • LCH.Clearnet retains ability to exclude specific ISINs
    • Overnight to 374 day terms will be supported
    • Forward start periods of up to 374 days
risk management
Risk Management

Initial Margin

  • Term £GC trades will be margined both intra-day and at end of day.
  • For trades received on a same day settlement basis, IM will initially be calculated based on a synthetic allocation of bonds.
  • Once the settlement allocations are known, positions will be margined based on the actual allocations as part of all subsequent margining processes.
  • Initial margin offsets will be supported between Term £GC trades and trades executed against specific collateral cleared via the existing Gilts market.
  • Variation Margin
  • Variation Margin will be called to reflect the change in the net present value of the repo interest only.
  • Delivery Margin
  • Delivery Margin will not be applicable to Term £GC (as per Sterling GC).
risk management1
Risk Management

Intra-day Risk Management

  • Term £GC will utilise the standard CREST TDBV functionality which adjusts collateral levels on a daily basis to ensure that the value of collateral appropriately covers the cash value of the transaction.
    • This will be augmented with an additional level of market risk management by LCH.Clearnet
settlement netting
Settlement Netting

The settlement netting process for Term £GC will be run as two independent steps: “Term Netting” and “End Date Netting”

Term Date Netting

  • The Term Netting process will seek to offset trades for which settlement will
  • be instructed “Today” (Day1 in the graphic) where trades have the same start and end date.
  • As per the graphic, in the Day 1 Term Netting process, trades 1 and 2 are netted to produce a settlement instruction for +£30mn

End Date Netting

  • This process examines the positions that have been instructed for settlement in CREST previously and
  • determines whether those existing positions can be increased or decreased in size, or potentially terminated in order to minimize the level of open positions within the TDBV settlement platform for the participant.
  • On Day 1 there are no positions that have been previously instructed for settlement, so no End Date netting takes place.
settlement netting1
Settlement Netting

TDBVSettlement Position in CREST following Day 1netting

  • As a result of the netting and settlement instruction which took place on Day 1, there is now a settlement position in place in CREST for +£30mn which has an end date of day 7.
  • On day 2, there is only a single trade for the counterparty so no Term Date netting can take place.
  • However the trade for -£20mn with an end leg settlement date of the day 7 must be considered for End Date netting.
  • Thus, the new trade and the existing position are End Date netted and the existing TDBV position in CREST is reduced from £30mn to £10mn.

TDBVSettlement Position in CREST following Day 2 netting

settlement netting2
Settlement Netting
  • Repo Interest
  • A separate netting process is utilised with respect to repo interest payments such that, on a daily basis, a single net repo interest payment in respect of all closing trades is instructed to CREST for settlement as a cash-only payment .
  • This mirrors the process that is used in the current Sterling GC product.
  • Settlement Instruction
  • LCH.Clearnet submits all settlement instructions using the CREST Direct Input facility so that participants do not need to instruct or match in CREST themselves as a “business as usual” activity.
  • This facility is used for all settlement instruction including the amendment of the size/early termination of settlement positions.
substitution of collateral
Substitution of Collateral
  • The use of collateral substitution within the Term £GC product is twofold:
    • In line with the bilateral market, substitution will be used by collateral givers where a specific bond is required in relation to a participant’s Delivery vs. Payment or Free of Payment transaction.
    • In relation to the Term £GC product specifically, substitution transactions will be automatically generated to support the return of the correct collateral to its original giver as part of the end leg settlement process.
  • The volume of substitution transactions which could be generated as a result of collateral return process may be significant:
    • On any given day there are likely to be multiple givers of collateral to LCH.Clearnet and multiple recipients of collateral from LCH.Clearnet.
    • Collateral delivered to LCH.Clearnet on an overnight basis may be allocated to a collateral taker on a term basis.  
  • It is essential that collateral which is allocated to participants as a result of the settlement of Term £GC trades is available for substitution using standard CREST Term DBV functionality.
  • Any costs incurred by LCH.Clearnet as a result of substitution failure in these circumstances will be charged to the member who fails to support the requested substitution.
tariff structure
Tariff Structure
  • Registration Fees
  • Registration fees for Term £GC trades will be charged on an ad-valorem basis as per the below table using a 360 day count convention:
    • The first 1-7 days @ 0.00275%
    • The next 8-90 days @ 0.00225%
    • The next 91+ days @ 0.00100%
  • In addition, a processing fee of £0.70 is levied per registered trade.
  • This fee structure is the same as that which is currently in place for Sterling GC.
  • Settlement Fees
  • Settlement related costs incurred by LCH.Clearnet in settling participants’ Term £GC positions in the EUI Term DBV settlement system will be recovered from participants.
programme timeline
Programme Timeline
  • Clients wishing to clear Term Sterling GC will need to interact directly with the CREST TDBV system. The CREST TDBV test environments are already available for Clients to utilise in their internal development processes.
  • The Term £GC product description is published which can be used as a basis for Participants internal development processes.
  • Additional technical specifications will be available from both LCH.Clearnet and EUI in September 2013.
  • EUI are developing additional functionality for LCH.Clearnet to support Term £GC, which is scheduled to go live on 17 March 2014.
  • LCH.Clearnet Member testing scheduled to commence February/March 2014.
  • Term £GC will go live in April 2014, following a period of around a month of the CREST changes running in the production environment.

What is available now?

Implementation timeline

transition of liquidity to term gc
Transition of Liquidity to Term £GC
  • Following the go-live of Term £GC, the current Sterling GC product will be continue to be available for a period of time and the two products will be supported in parallel.
  • Whilst pragmatic as a short term solution, this approach is likely to lead to an undesirable split of liquidity across the two products.
  • Will seek to create an environment where a high proportion of existing
  • Sterling GC users are able to trade the new Term £GC product from
  • launch such that there is a natural transfer of liquidity into Term £GC.
  • At a point in time three months after the launch of Term £GC it is
  • proposed to withdraw the Sterling GC product such that new trades
  • can no longer be registered.
  • Based on the current maturity profile of Sterling GC, 99% of all open trades would mature within the 3 month period leaving only a small proportion of trades to be transferred across to the new product.
contacts and additional information
Contacts and Additional Information
  • For further information on the Term £GC product, please contact:
  • Manisha Mistry
  • Email:
  • Tel: +44 20 7426 7199
  • Or
  • Nick Maggs
  • Email:
  • Tel: +44 20 7426 7442

Cleared Term DBV

23 July 2013



  • Initiative launched by Chris Salmon 24th Jan 2013 – speech to LMMA
  • Sub-group of MMLG created to co-ordinate the work required to introduce and adopt the new product
  • Sub-group includes representatives from EUI, CREST, LMMA, DMO, ISLA, Bank of England, major repo trading banks
  • Product design proposed by LCH / EUI and agreed
  • Implementation timelines drawn up
  • Changed cost impacts assessed
  • Market discipline regime agreed


  • Objective has always been to get widespread support to ensure good market liquidity
  • Aim of the sub-group is therefore ensuring that the product is fit for purpose for market participants and they are ready to use it – this is key to finalising the implementation process
  • Sub-group has been widened to ensure greater representation
  • Communication of CTDBV plans through:
      • MMLG
      • SLRC
      • LMMA
      • ISLA
      • BBA
      • Major market traders


  • Expectation that new CTDBV product will be introduced in mid 2014 – so preparations should begin now if not already started:
      • Full understanding of product design, settlement routine changes
      • Asses impact on existing business / trading habits
      • Scope changes to existing processes / habits
      • Model cost impacts
      • Engage with LCH / EUI as necessary (detailed documentation available on websites)
      • Ensure suitable collateral position monitoring and management
      • Timely focus on IT changes (if required)
      • Commit resources to market testing of both BAU and migration process
  • Existing LCH DBV product will be discontinued after a short period of parallel running (EUI o/n DBV product will continue)


  • Front Office and Back Office have been engaged on the project since January.
  • Full understanding of product and changed trading and settlement requirements.
  • Little technical IT changes required.
  • Main action is to segregate CTDBV from trading inventory – separate CREST accounts and enhanced Front Office MI.
  • Modelling of settlement / trading cost impacts has been performed.
  • Review of policy and procedure documents – including second line oversight review.
  • Will be fully engaged in testing. Counterparty engagement to follow.


  • Sub-group will continue to steer through CTDBV – particular focus on testing outcomes
  • Continued communication as wide as possible
  • Comments / issues welcomed
  • Bank of England will write to market participants in September to get confirmation of market readiness
  • New product could be used to term out current large o/n DBV positions used to collateralise stock borrowing transactions


  • Fails – not acceptable, but no financial penalties beyond recharge of costs incurred
  • Exploring feasibility of daily fails reporting
  • Exploring feasibility of system flags to avoid stock being removed from the CTDBV cycle
  • Existing EUI / LCH rules to apply, updated as required
  • Bank of England to update 2011 “TDBV Good Market Practice” document
  • Eventual update to Gilt Repo Code of Conduct
  • Default position is that “trading to fail” is unacceptable, accidental fails should be avoided
closing remarks
Closing remarks

Ian Mair: Chair, London Money Market Association



Cleared Term DBV

23 July 2013