Buy Side Challenges in the Field

of Collateral Management

Marc Jahncke, State Street

May 28th, 2015
Agenda

The Evolution of Collateral Management

Buy Side Challenges

Collateral Optimization

Industry Initiatives & Utilities

 Pre-crisis Era

• Prior to 2009, strict regulations did not exist on

collateralized products. Over-the-counter
derivatives were traded under an ISDA Master
Agreement or long form confirmation

• Not all swaps were collateralized

• Those companies that did collateralize trades

Minimal Back-office under a CSA did so based on terms agreed
regulation function between the two parties

• Very little initial margin was exchanged. IM

requirements were based on internal credit and
risk reviews of the counterparty

• Collateral management was viewed solely as a

back-office function
Operating in silos
• A means to an end to trade certain products

• Operations were performed in silos on outdated,

retrofitted, or offline technology platforms

Marc Jahncke, GLC Collateral Management Forum 2015

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 Following the Crisis – Current State and Goals

• Post 2009, massive regulations hit the derivatives

market. Most notably Dodd-Frank in the US and
EMIR in Europe

• Companies rushed to consolidate their operations

and technology for a full view of the underlying
exposures and collateral positions

• The terms collateral optimization and

Consolidation Optimization
transformation begin to take hold as the future of
collateral management

• Margin call management becomes an important

operational step and is continuously changing due
to new players in the market and new regulations
(i.e., IM and VM, portfolio bifurcation, etc.)
Transformation

Marc Jahncke, GLC Collateral Management Forum 2015

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 Future State of Collateral Management

• As more and more regulations come into effect

everyone needs to be able to move collateral
quickly and efficiently

• Automation and integration will be key for

companies with increasing collateral requirements

Traditional • Connection to various up and coming market

Market infrastructures will be vital in this setup
margin call
Infrastructure
management
Integration • Consolidated perspective on collateral sources as
behind us
well collateral needs has to be available to all
stakeholders at any point in time

Collateral Gatekeeper

Marc Jahncke, GLC Collateral Management Forum 2015

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Agenda

The Evolution of Collateral Management

Buy Side Challenges

Collateral Optimization

Industry Initiatives & Utilities

 Global Regulatory Impacts
Region Regulation Product Client Types
• ETF
EMEA ESMA • Securities Lending • UCITS
• Repo

EMEA AIFMD • All collateralized products • Alternative Investment Funds

• OTC derivatives
EMEA EMIR
• Cleared swaps
ICMA ERC – Repo Margining Best Practices –
EMEA • Repo
2012
• OTC derivatives
US Dodd-Frank Title VII
• Cleared swaps • Asset Managers
TMPG (Treasury Market Practices Group) • Forward-settling agency MBS (TBA, • Pension Funds
US • UCITS (EMEA)
Agency MBS Recommendation CMOs, Specified pools)
• 1940 Act Funds (US)
Basel (BCBS) / IOSCO Rules for non-cleared • Investment Managers
Global • OTC derivatives
margin • Asset Owners
• Insurance
• OTC derivatives • Re-insurance
APAC - Australia Corporations legislation amendment
• Cleared swaps • Banks
• OTC derivatives • Non-financial corporates
APAC - HK Securities and futures ordinance
• Cleared swaps
Financial Instruments and Exchange Act of • OTC derivatives
APAC - Japan
2010 / 2012 • Cleared swaps
• OTC derivatives
APAC - Singapore Securities and Futures Act of 2012
• Cleared swaps

APAC - China Insurance regulatory commission • OTC derivatives • Insurance

Marc Jahncke, GLC Collateral Management Forum 2015

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 Industry Drivers
A bifurcated portfolio of CCP and un-cleared swap margining will
Technology require dual processes. Substantial increase of collateral
transactions will put strain on current applications

Collateral in circulation estimated to increase due to enhanced

Volume collateral requirements

The need to quickly mobilize collateral is increasing. There must

Velocity be an understanding of how much collateral is needed and
where it is required in a much more efficient manner than today

Operational complexities will drive up cost and consequently

Expense firms will look to outsource operations

Clients will require more robust reporting capabilities from their

Reporting service providers, FCMs and CCPs

By optimizing collateral, clients are able to more efficiently

Optimization manage their asset inventory with the impending shortage of
high-quality, eligible collateral

For those companies that cannot source eligible collateral

Transformation internally there is a need to transform or enhance their collateral
in inventory to higher quality eligible collateral

Marc Jahncke, GLC Collateral Management Forum 2015

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 Key Challenges

• Meeting new collateral demands Addressing Challenges

Increased volume of collateral in
circulation
Increased frequency and number of
margin calls
Consolidation of collateral operations
Efficiently managing asset inventory
using collateral optimization rules such as
cheapest to deliver

• Trade reporting
Ability to perform what-if scenario
analysis on a pre-trade basis

• Potential high quality, eligible collateral

Implementation of various market
shortfall infrastructures
Pre-trade analytics
From collateral management to collateral eco-
Collateral optimization system
Collateral transformation

Marc Jahncke, GLC Collateral Management Forum 2015

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 Key Challenges (continued)

• Central Clearing Addressing Challenges

• Implementation of un-cleared swap Re-negotiation, re-papering of CSAs

margin rules to include new regulations

Global fragmentation of rules (US,

EMEA, APAC) Ensure systems are enhanced
to include new terms and
Calculation of IM (model vs. standard calculations including margining
schedules) at currency level
Segregation of IM

Possible currency silos to avoid Implementation of initial margin

model using SIMM as template
additional haircuts on collateral (ISDA model)
4 year phase-in from Sep 1st 2016 – Dec
1st 2020

Marc Jahncke, GLC Collateral Management Forum 2015

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Agenda

The Evolution of Collateral Management

Buy Side Challenges

Collateral Optimization

Industry Initiatives & Utilities

 Collateral Optimization
What is collateral optimization?
• Collateral optimization is the process by which a firm decides how best to allocate its collateral held in
inventory to individual collateral requirements. These decisions are made on an automated basis and
involve the following parameters:
– Collateral requirements (product agnostic)
– Eligibility criteria along with haircut schedules and concentration rules
– Asset inventories
– Collateral pledged or held
– Optimization rules such as ‘cheapest to deliver’, minimize settlement costs, longest maturity,
ratings hierarchies

Why is collateral optimization important?

• Due to increasing regulations in the derivatives market, it is likely that there will be a shortage of high
quality collateral available in the marketplace. Collateral optimization provides a way to efficiently
manage clients’ collateral inventories against their margin requirements

Marc Jahncke, GLC Collateral Management Forum 2015

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 Optimization Flow

Collateral and Custody System Inputs

Collateral Collateral
Agreement Terms Collateral Inventory
Pledged/Held Requirements

Optimizer
Rules Engine Asset Inventory Inventory Substitutions and
(algorithms) Allocation Management Rehypothecation

Outputs
Reporting Transaction Management

Marc Jahncke, GLC Collateral Management Forum 2015

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Agenda

The Evolution of Collateral Management

Buy Side Challenges

Collateral Optimization

Industry Initiatives & Utilities

 AcadiaSoft and TriOptima

• Electronic Margin Call messaging

• Secure transfer of collateral calls
integrated into collateral systems
• Increased automation, reducing manual
AcadiaSoft process and error
• Provides real time visibility into any
dispute and exposures
• Robust reporting and dashboard views

• Post trade infrastructure initiative

• Industry utility providing proactive
reconciliation services mitigating disputes
between parties
TriOptima • Mitigates manual processes through
automation of dispute management and
reconciliation with the counterparty
online, in real time

Marc Jahncke, GLC Collateral Management Forum 2015

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 DTCC Margin Transit Utility (MTU)

Matching engine for

margin calls

Receive and record

settlement status Create margin call
Report the collateral record (per entity)
activity and positions

Send pledge, transfer

Enhance matched and
and bilateral payment
calculated margins to
instructions to
settlement instructions
custodians, depositories
(use of SSI’s, LEI’s)
etc. upon enrichment
Marc Jahncke, GLC Collateral Management Forum 2015

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 DTCC/Euroclear Collateral Management Utility (CMU)

Consolidates users’ assets under a single inventory and

collateral management system

Optimizes and allocates mutual assets meeting

exposure requirements in the EU and US regions
Collateral
Management Assets will remain on the books of depository, while
Utility accounts are opened in the other depository

Collateral allocations and settlement obligations will

fully integrate with the relevant depository

Reduces settlement failures and bottlenecks in the

collateral management process

Marc Jahncke, GLC Collateral Management Forum 2015

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 Q&A

Marc Jahncke, GLC Collateral Management Forum 2015

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