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Collateral optimisation
Xuan Son NguyenBreakout session Euroclear Collateral Conference
Monday, 12 May 2014
Triparty collateral managementAutomating collateral management tasks
Collateral Giver
Exposure
SecuritiesCollateral Taker
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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?...
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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 AAA
BBB
AAA AAA
BBB
AFAIL !
C/P1 C/P2
A
C/P1 C/P2
CG CG
NewTrs
New receiptA
(2)
AAA
(1)
AAAAAA
BBB
BBB
AAA
C/P1
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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 A
BBB
AAA
AAA
C/P1 C/P2
A
C/P1 C/P2
CG CG
AAA
BBB
AAA A
BBB
AAA
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 trades
INITIATION of NEW trades
Collateral
Cash
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04:30
SET1 SET2
19:00
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@UK
Client@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 Sourcing
Collateral Management & Optimisation
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