Collateral optimisation
Xuan Son Nguyen
Breakout session
Euroclear Collateral Conference
Monday, 12 May 2014
Triparty collateral management
Automating collateral management tasks
Exposure
Collateral Giver
Securities
Collateral Taker
2
Why optimising collateral allocation?
• Basel III: LCR & NSFR
• Dodd-Frank & EMIR:
mandatory margining
of OTC derivatives
• Sovereign downgrade
• higher haircuts
• limited velocity
…
Increased need
of quality-collateral
Lower availability
of quality-collateral
Collateral shortfall?...
3
Euroclear collateral optimisation
A comprehensive solution
Fail
reduction
Benefits:
• Early exposure coverage
• A reduction in fails
Optimal
Initial
allocation
Credit
usage
• Minimising overall cost of funding
• Minimised credit usage
Quality
• At no extra cost !
4
Euroclear collateral optimisation
It starts at initial allocation...
AutoSelect
the automatic triparty collateral allocation
and monitoring module of Euroclear
1. Determine available collateral positions
2. Determine collateral operations to be processed
3. Collateral allocation algorithm
4. Generation and injection of settlement instructions
5
Euroclear collateral optimisation
It starts at initial allocation…
AutoSelect
the automatic triparty collateral allocation
and monitoring module of Euroclear
AutoSelect standard allocation order
Available
collateral
• Same currency first (optional)
• Rating (lowest to highest)
• Position size (smallest to largest)
• Issuer type (other to supra to sovereign)
• Market type (international to domestic)
• Euroclear security code (highest to lowest
6
Euroclear collateral optimisation
It starts at initial allocation…
AutoSelect
the automatic triparty collateral allocation
and monitoring module of Euroclear
Full flexibility at initial allocation
You can define sub-pools of collateral and the
order in which you wish to allocate them
E.g. Small caps
Secondary indices
Primary indices
7
Euroclear collateral optimisation
And beyond!
Fail-driven
What if
there is a mismatch between the time of the trade
and time of availability of eligible collateral?
Quality-driven
What if
the quality of the eligible collateral portfolio
evolves during the life of the trade?
Credit-driven
What if
the far leg of the repo settles early in the day,
while you planned to roll it later on the same day?
8
Euroclear collateral optimisation
And beyond!
AutoSelect
Fail-driven è collateral swaps
What if
(1)
there is a mismatch between the time of the trade
and time of availability of eligible collateral?
(2)
New receipt
A
BBB
AAAAA
A
AAA
CG
CG
A
BBB
AAA
AAA
C/P1
C/P1
BBB
New
Trs
FAIL !
C/P2
AAA
A
AAA
BBB
A
AAA
C/P1
C/P2
9
Euroclear collateral optimisation
And beyond!
AutoSelect
Quality-driven è collateral swaps
What if
the quality of the eligible collateral portfolio
evolves during the life of the trade?
CG
CG
CG
A
AAA
Receipt
A
AAA
BBB
AAA
C/P1
BBB
AAA
C/P2
AAA
C/P1
A
BBB
AAA
C/P2
AAA
C/P1
A
C/P2
10
Euroclear collateral optimisation
And beyond!
AutoSelect
Credit-driven è synchronise DvP settlement
What if
the far leg of the repo settles early in the day,
while you planned to roll it later on the same day?
CLOSING of OLD trades
S-1
S
INITIATION of NEW trades
Securities Settlement System
GIVER
Cash
Cash
Collateral
Collateral
TAKER
11
Euroclear collateral optimisation
Throughout the day
Fail-driven optimisation
New quality-driven optimisation
A
U
T
O
SET1
SET 1
A
U
T
O
A
U
T
O
A
U
T
O
A
U
T
O
A
U
T
O
A
U
T
O
SET2
02:00
03:15
A
U
T
O
A
U
T
O
A
U
T
O
A
U
T
O
A
U
T
O
A
U
T
O
A
U
T
O
A
U
T
O
A
U
T
O
A
U
T
O
A
U
T
O
Real-time settlement
04:30
04:30
06:00
07:00
08:00
09:00
10:00
11:00
12:00
12:45
13:30
14:25
15:30
16:30
17:45 18:20
19:00
Rollover
optimisation
12
Open Inventory Sourcing service
Consolidating fragmented pools
Open Inventory Sourcing
Collateral Management & Optimisation
Domestic markets
Client@Italy
Client@Spain
Client@UK
Client@France
Client@Germany
Client@USA
Pool of
collateral
Securities
Fixed Income
&
Equities
Repo – Set1
Bank 1
Repo – Set 2
CCP1
Repo – Set 3
Asset
Manager
Liquidity – Set 4
Central
Bank
Derivatives – Set 5
CCP2
Sec. Lending – Set n
Lender
Client@Japan
13