Collateral optimisationXuan Son NguyenBreakout session Euroclear Collateral Conference

Monday, 12 May 2014

Triparty collateral managementAutomating collateral management tasks

Collateral Giver

Exposure

Securities Collateral Taker

2

Why optimising collateral allocation?

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• 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?...

4

Euroclear collateral optimisationA comprehensive solution

Benefits:• Early exposure coverage • A reduction in fails• Minimising overall cost of

funding• Minimised credit usage• At no extra cost !

OptimalInitial

allocation

QualityCredit usage

Fail reduction

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1. Determine available collateral positions

Euroclear collateral optimisationIt starts at initial allocation...

AutoSelectthe automatic triparty collateral allocation and monitoring module of Euroclear

2. Determine collateral operations to be processed

3. Collateral allocation algorithm

4. Generation and injection of settlement instructions

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Euroclear collateral optimisationIt starts at initial allocation…

• 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

Availablecollateral

AutoSelect standard allocation order

AutoSelectthe automatic triparty collateral allocation and monitoring module of Euroclear

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Full flexibility at initial allocation

You can define sub-pools of collateral and the order in which you wish to allocate them

Secondary indicesE.g. Small caps Primary indices

Euroclear collateral optimisationIt starts at initial allocation…

AutoSelectthe automatic triparty collateral allocation and monitoring module of Euroclear

8

Fail-driven

What if there is a mismatch between the time of the trade and time of availability of eligible collateral?

Quality-driven

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?

Euroclear collateral optimisationAnd beyond!

What if the quality of the eligible collateral portfolio evolves during the life of the trade?

Fail-driven collateral swaps

What if there is a mismatch between the time of the trade and time of availability of eligible collateral?

Euroclear collateral optimisationAnd beyond!

AAA A AAABBBAAA AAA

BBBAFAIL !

C/P1 C/P2

A

C/P1 C/P2

CG CG

NewTrs

New receiptA

(2)

AAA

(1)

AAAAAA

BBB

BBBAAA

C/P1

9

AutoSelect

Quality-driven collateral swaps

Euroclear collateral optimisationAnd beyond!

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What if the quality of the eligible collateral portfolio evolves during the life of the trade?

AAA ABBBAAA

AAA

C/P1 C/P2

A

C/P1 C/P2

CG CG

AAABBBAAA A

BBBAAA

C/P1 C/P2

CG

AAA

ReceiptA

AutoSelect

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Credit-driven 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?

Euroclear collateral optimisationAnd beyond!

AutoSelect

Securities Settlement System

SS-1

GIVER

TAKER

Cash

Collateral

CLOSING of OLD tradesINITIATION of NEW trades

Collateral

Cash

12

04:30

SET1 SET219:00

AUTO

AUTO

AUTO

AUTO

AUTO

AUTO

AUTO

AUTO

AUTO

AUTO

AUTO

AUTO

AUTO

AUTO

AUTO

07:00 08:00 09:00 11:00 13:30 14:25 15:30 16:3006:00 10:00 12:45 17:4504:30

SET 1

AUTO

03:15

02:00

AUTO

18:20

New quality-driven optimisation

Fail-driven optimisation

Rolloveroptimisation

AUTO

12:00

Real-time settlement

Euroclear collateral optimisationThroughout the day

Open Inventory Sourcing serviceConsolidating fragmented pools

Client@Italy

AssetManager

Client@Spain

Client@UKClient@France

Client@Germany

Client@Japan

CCP1

Central Bank

CCP2

Bank 1

Pool of collateralSecurities

Fixed Income&

Equities

Repo – Set1

Repo – Set 3

Repo – Set 2

Liquidity – Set 4

Derivatives – Set 5

LenderSec. Lending – Set n

Domestic markets

Client@USA

Open Inventory SourcingCollateral Management & Optimisation

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