ACSDA General Assembly

Casa Santo Domingo Antigua, GuatemalaWednesday, April 17, 2013

COLLATERAL MANAGEMENT SERVICES

Presented by Monica Singer (Strate) on behalf of the Liquidity Alliance

Australia

BrazilEuropeCanada

South Africa

The Liquidity Alliance (LA) | 2

Liquidity HubGO

Imminent additional partners

Implemented

July 2013

November 2013

Europe

October 2013

Implemented

Key Drivers Requiring Collateral

3

| 3

BASEL III

• Greater regulatory capital requirements;

• Bigger Liquid Asset Requirements;

• Credit Value Adjustments.

CPSS/IOSCO

Solvency II

• Increased capital adequacy requirements for Life Companies

Local RegulationsDodd Frank,

EMIR etc.

•Increased:•Asset safety;•Collateralisation.

• Asset safety• Scarcity of cash as

collateral;• Limited high quality eligible assets • Re-evaluation of

qualifying securities• Risk mitigation

Stre

ngth

en B

i-lat

eral

Ri

sk M

anag

emen

t

G-20 Recommendations

Incr

ease

d Ca

pita

l Re

quire

men

ts

Incr

ease

Tr

ansp

aren

cy• Increased

transparency;•Guidelines on

collateral management practices;

C

C

C

C

Central ClearingTrade Repository C

C

| 4Opportunity for CSDs

Validation/Eligibility Criteria

Automatic Allocation

Automatic Margin Calls

Automatic Substitution

Collateral Optimisation

Reporting

Haircuts Concentration Limits Buffers/Thresholds Minimum tradable

amounts Eligibility Changes

CSD

Bonds Equities Money Market

Centralised management = lower costs and risk

Multi-asset class

Facilitate “Last Resort” Cash Collateral Calls

Motivation for CSD offering Tri-Party Collateral Management Services

5

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A Central Securities Depository is:

• a trusted third-party,

• independent and self contained,

• of a different risk profile,

• neutral (never a counterpart to a trade),

• holder of sacrosanct dematerialised records for various asset classes available as collateral.

• Facilitates the processing of Corporate Actions and Capital Events

| 6

Different offices/divisions/systems

Different instruments

Managed by different people, with different agendas

Complex collateral relationships

Current South African Collateral Market

Traders want the best results

at the best price

Risk managers want to minimise risk and keep the firm safe

from loss

Securities

Treasury

Lending

Risk Credit

Asset Management

Unsecured Loans

Over-The-Counter (OTC)

Repos

On Market Derivatives

Securities Lending and Borrowing

Bi-Lateral cash loans

Secured loans

Syndicated loans

Collateral allocation must come from a central pool

D E F

A B C

• Many manual interventions (use of Excel is prolific)• Issues exist around processing Corporate Actions in collateral substitutions

Tri-Party Collateral Solution

Third Party Collateral Manager

Bank

BankBank

Bank

Posting Collateral Posti

ng Co

llate

ral

Posting Collateral

Posting C

ollateral

Tracking Collateral

Tracking Collateral

A tri-party system would be able

to automatically and accurately:

• Regular collateral valuation

• Track all re-use of collateral.

• Provide daily reconciliation.

• Reduce exposure measure

errors which will lower

operational risk.

• Removing Internal and External Silos – enabling optimisation• Centrally automating collateral management for the industry using a market-wide

collateral pool enabling optimisation across all relationships• Providing additional Asset Safety to investors , as assets are held directly in the CSD

Tracking Collateral

Tracking Collateral

Why Clearstream’s Liquidity Hub GO solution

• CSD continues to maintain the legal relationship with its customers;

• Collateral retained locally in the accounts of the underlying customers with the CSD;

• In a default or infrastructure interruption scenario, the perfection of collateral will

always follow local rules and regulations;

• CSD becomes a sophisticated provider of collateral management services:

• assuming no principal risk

• Utilises white-labelled functionality independent of the CSD’s core settlement/custody

systems;

• no contagion risk from the solution

• offering 24-hour service .

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Phased approach

• Phase 1 – using local dematerialised securities to collateralise local open

financial exposures;

• Phase 2 – using foreign dematerialised securities to collateralise local open

financial exposures; and

• Phase 3 – using local dematerialised securities to collateralise foreign open

financial exposures.

• (Phases 2 and 3 in no order of priority)

Benefit of the Liquidity Alliance will be exponential

once phases 2 and 3 are implemented

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Benefits of the Liquidity Alliance (LA)

• Utilising a solution already successfully implemented and utilised by other CSDs;

• Clearstream’s experience in successful implementations in other markets;

• Sharing global insights, knowledge and experiences;

• Enabling cross-border collateral optimisation and collateral movements on a common

platform;

• Economies of scale on required technology changes

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Thank you!