1 Triparty Collateral Management The efficient outsourced solution for managing and securing repo...

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Triparty Collateral Management

The efficient outsourced solution for managing and securing repo transactions

AMEDA meetingBeirut – 29 April 2010

Bernard FerranRegional Head, Relationship [email protected]

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• Introduction

• Repos and the repo markets

• Triparty collateral management

• Collateral Allocation Interface – Central Bank model

AMEDA – Beirut 29 April 2010Agenda

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Lehman Brothersbankruptcy

A number of investment funds freeze redemptions

Leverage crisis and credit crunch turns into a full blown insolvency problem

Emergency rescueof Bear Stearns

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

Concerns about the valuation of

structured products

• 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

9 Aug 2007 15 Sep 200813 March 2008

Market turmoilThe key milestones

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Market turmoilEurepo/Euribor 3M

Rescue of Bear Stearns

0.00

1.00

2.00

3.00

4.00

5.00

6.00

10/0

3/2

002

08/0

2/2

004

08/0

1/2

006

27/0

4/2

007

17/0

9/2

007

07/0

2/2

008

01/0

7/2

008

19/1

1/2

008

15/0

4/2

009

03/0

9/2

009

26/0

1/2

010 0

20

40

60

80

100

120

140

160

180

200Euribor 3 M

Repo 3 M

Spread

Collapse ofLehman Brothers

Problems atNorthern Rock

Problems at IKB

Problems at Sachsen LB and West LB

Dillon Read HF

shut down by UBS

Bear Stearns shuts down

two HFs

Citi closes 7 SIVs

Aug 23 – ECB Long Term

Reserve Operation

Sep 12 – ECB Long Term

Reserve Operation

Dec 12 - concerted CB

action (FED, ECB, BOE, SNB) – TAF

auction

March 11 -Other CB coordinated effort

announcing $200bn of new emergency lending for banks

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• Unsecured market dried-up

• Term market disappeared

• Unsecured market dried-up

• Term market disappeared

• No more term financing

• Secured money market

•CCP GC baskets

• No more term financing

• Secured money market

•CCP GC baskets

• Massive intermediation

• Contingency schemes

• Massive intermediation

• Contingency schemes

UnsecuredMoney

markets

No collateral !

Central bank credit/liquidi

tyRoutine

(e.g. tenders, …)Contingency

Repo

Cash drivenSecurities

driven

Securities lending

Securities collateral

Cash collateral

• Concerns of final Beneficial Owners on certain cash reinvestment programs

• Concerns of final Beneficial Owners on certain cash reinvestment programs

+

---

A major crisisAcross all market segments

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• By order or priority, the money-markets investors will focus on

► Credit/counterparty risk

► Liquidity risk

► Return

What investors focus on ?Priorities

Need to find a secured financing solution

The repo markets

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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

8

• Introduction





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• 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 price equal 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 marketsAn introduction

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• 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 marketsAn introduction

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

SpanishBank B

€10,000,000 of DE0001134492DutchBank A

€ 12,157,315.07

D-dayD-day

D-day+ 1 month

D-day+ 1 month

SpanishBank B

€10,000,000 of DE0001134492DutchBank A

€ 12,166,579.96

Repos and the repo marketsThe mechanics of a repo trade

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Repos and the repo marketsBloomberg screen

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• 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 marketsThe functions of a repo desk

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• 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

Repos and the repo marketsRisks and risk mitigation

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ICMA Survey (in €bn)

4,868

4,633

2,298

6,5046,3826,4305,883

5,000

3,7883,377

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2001 2002 2003 2004 2005 2006 2007 June 08 2008 June 09

ICMA Survey

Repos and the repo marketsThe European repo market

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The European repo marketCollateral analysis

46.4%

18.7%

23.1%

1.6%

4.0%

0.1%

0.7%

5.4%

AAA AA A BBB

<BBB A1P1 A2P2 Unrated

21%

19%

5%

5%

2%

6%5%

24%

13%

1 day 2 days to 1 week

1 week to 1 month >1month to 3 months

>3 months to 6 months > 6 months to 12 months

> 12 months forward-start

open

11%

19%

29%

41%

Direct dealing Triparty

Voice-brokers ATS

• Share of sovereign collateral 81. 2%

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• Introduction





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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

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* Acting as representative

Collate

ral

Takers

Broker Dealers

Collate

ral

Giv

ers

1993 … … 2010

Central Banks

Agent lenders

Custodian Bank*Investment ManagersAsset Managers, Money Market Funds, Corporates …

Commercial Banks

Euroclear Triparty client baseIncreasing financing opportunities

Custodian Bank* Hedge Funds

Commercial Banks

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• 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

Repos and the repo marketsRisks and risk mitigation

Trip

arty

Col

late

ral M

anag

emen

t Triparty C

ollateral Managem

ent

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CONCENTRATIONLIMITS

MARGINPERCENTAGES

Criteria Time to maturity Instrument type Rating Issuer type Country Quotation age Capitalisation Traded volume

Mitigating liquidity and market risks

Interest rate risk Market volatility Foreign exchange risk

Credit risk Country risk Event risk

Liquidity risk

ELIGIBILITY

The outsourcing solution Market and liquidity risk of securities collateral

Risks Risk mitigation

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Triparty Service AgreementOperating ProceduresTerms and Conditions

Eligibility profileConcentration profileMargin percentages

Bi-lateral Contract

Collateralgiver

Collateraltaker

ELIGIBILITY SET 1• Eligible : AAA - A• No concentration• x % haircut

ELIGIBILITY SET 2 •Eligible : AAA - BBB• only y % of BBB • z % haircut

Triparty collateral managementThe Collateral Management outsourcing solution

Neutral agent

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Processing

Bilateral agreementCollatera

l giver

Triparty service agreement

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

Collateral taker

+

Triparty collateral managementOperational risk

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Triparty Collateral Management

Cash exposure of the repo

Value of Securities collateral

Triparty collateral management Mitigating risks of repo transactions

• Daily mark-to-market

• Automatic and unilateral margin calls

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TripartyServices

TRANSACTION

Matching

Selection

Transfer

Valuation

Custody

Reporting

In an efficient,

scalable,

risk-controlled

environment

Collateralgiver

Collateraltaker

The outsourcing solutionMitigating the operational risk

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Collateral GiversCollateral Takers

• 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 services for securities used as collateral

• Granular reporting for full control over the management of the exposure

• 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 services for securities used as collateral

• Granular reporting for full control over the management of the exposure

• 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

• 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

Triparty collateral management Customer’s benefits

• By outsourcing and automating the operational burden related to collateral management, you reduce your back-office workload and operational risk

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• Monitoring collateral position

► Static data (triparty agreements)

► Dynamic data (updated 8 times a day)

• Supporting trading activity

► Funding possibilities

► Customized reports

ReportingTriweb: trade simulation & granular reporting

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ReportingTriweb: trade simulation & granular reporting

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• 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

Triparty Collateral ManagementThe Collateral Hub

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• Introduction





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Collateral Allocation Interface Central banks taking central stage

Euroclear Bank

Credit Institution

Central Bank

Credit

Collateral Profile

Collateral Management Services

(CMS)

.

AutoSelect

Triweb

In line with Central Bank control requirements

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Credit Institution

Central Bank

Collateral

Outsourcing

Collateral Profile

Reporting

Custody

Valuation

Settlement

Selection

Matching

EvolutionOutsourcing?

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Easier access to central bank creditCollateralising central bank credit in triparty

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Thank you

1 Triparty Collateral Management The efficient outsourced solution for managing and securing repo...

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