Triparty collateral. A guide to providing collateral via triparty at LCH.Clearnet Ltd

Transcription

1 Triparty collateral A guide to providing collateral via triparty at LCH.Clearnet Ltd

2 Why use triparty collateral services? 1. It s efficient Triparty collateral services allows Clearing Members to provide securities collateral to LCH.Clearnet Ltd (the Clearing House) to cover initial margin liabilities in an efficient way. Providing securities on a bilateral basis can be operationally burdensome and inefficient, triparty provides mechanisms to increase efficiency and optimisation of collateral. 2. It s automated When delivering securities via triparty services there is no need to specify the specific securities (ISINs) to be provided. Instead a value of securities is specified and the triparty agent will automatically select the securities and deliver them to the Clearing House. 3. It s growing The Clearing House current takes around 20% of it s securities via triparty services. There is increasing demand for efficiency and optimisation in collateral processing. The Clearing House is developing more services that will leverage triparty processing. 2

3 Triparty terminology For Clearing Members that are new to triparty services, there are certain concepts to understand: 1. Triparty agent the entity that provides triparty services, the agent performs the automated functions used within their triparty service. Triparty agents ensure that triparty transactions remain collateralised and that collateral operations are carried out efficiently. 2. Transaction Amount /Triparty Exposure the amount agreed between the collateral giver (Clearing Member) and the collateral taker (Clearing House). This is the post haircut value of securities to be transferred to the Clearing House. The Clearing House will book the transaction value to the relevant account of the Clearing Member. 3. Margined Value/Collateral Value This is the actual post haircut value of securities transferred to the Clearing House this is normally equal to or greater than the Transaction Amount. 4. Execution Date This is the date on which the triparty agent will attempt to initiate, amended or close a triparty transaction. 5. Triparty instruction this is the instruction to the triparty agent to undertake an action on a triparty transaction i.e. initiate, amend, close, cancel. Instructions must be sent by both counterparties and must match before being actioned. 3

4 Triparty terminology cont.. 6. Triparty transaction Sometimes known as the triparty shell. This is the transaction that is created when triparty instructions are matched. The transaction ensures continued collateralisation of the collateral taker through automation of the underlying securities allocation and settlement. 7. Triparty schedule the schedule specifies the securities that the collateral taker is willing to accept. For the Clearing House this is equivalent of eligible securities. The schedule also specifies the haircuts and concentration limits to be applied. 8. Triparty allocation this is an automated process undertaken by the triparty agent throughout the day (either in scheduled batches or continuously), the process allocates securities to the collateral giver based upon the triparty schedule s parameters and collateral operations i.e. changes to the transaction from new instructions. 9. Optimisation run this process ensures that the collateral provided to the collateral taker is optimised according to rules set by the collateral giver. 10. Automatic substitution the collateral giver may want to remove securities that have been provided to the collateral taker and provide alternative securities. This process ensures that alternative securities to at a least the value of the securities being removed are automatically selected and provided simultaneously. 11. Long box / Dealer box / Giver account /Source account these are terms used to describe the account used by the collateral giver to provide collateral within the triparty service. 4

5 Triparty processing benefits 1. Corporate actions Corporate actions are managed by the triparty agent. The agent will ensure that any coupons are paid to the giver s account. Where that are tax implications for certain securities, the agent will ensure that the securities are automatically substituted back to the giver account to ensure correct processing. 2. Automatic substitution Any security that is being used within a triparty transaction to collateralise an exposure may be required by the collateral giver to deliver away. In order to ensure that the collateral taker remains fully collateralised at all times, the triparty agent will automatically identify an alternative security of equal or greater value and simultaneously substitute the assets. This allows the collateral giver freedom to move specified assets out of the takers account without manual intervention. 3. Collateral optimisation The triparty schedule is defined by the collateral taker i.e. LCH.Clearnet, according to its eligible collateral. Additionally, LCH.Clearnet also specifies concentration limits and haircut to be applied by the agent. However, the collateral taker is able to prioritise the assets to be provided to the taker. This ensures that the assets delivered are optimised from the collateral givers perspective. The triparty agent will ensure collateral optimisation processes are regularly run within their systems. 4. Market deadlines Typically the deadlines for delivering assets on a bilateral basis are much shorter than delivery within triparty. Since assets are aligned to the triparty agent s account environments the typical market deadlines do not apply. See p.8 for further details of triparty deadlines. 5

6 Triparty process flow Clearing Member Triparty instructions Triparty agent Triparty instructions Clearing House Triparty feedback & reporting Triparty feedback & reporting Taker account (LCH.Clearnet Ltd) Securities movements Triparty instructions SWIFT MT527 or manual instruction Giver account (Clearing Member) Triparty feedback & reporting SWIFT MT558 & MT569 or proprietary reporting 6

7 Triparty process flow 7

8 Triparty agents Eligibility and instruction deadlines Triparty agent Schedule (Non FCMs) FCM House schedule FCM Client schedule Euroclear Bank Full eligibility Full eligibility EUR denominated only Clearstream Full eligibility Full eligibility EUR denominated only BNY Mellon USD denominated only USD denominated only USD denominated only Triparty agent CMS instruction deadline* (UK time) Future dated instructions? Note: LCH.C does not accept cash collateral in triparty Euroclear Bank Yes Clearstream Yes BNY Mellon No same day only * CMS instruction deadline by which Clearing Members must enter the details of a triparty instruction in the LCH.C CMS application. 8

9 Triparty instructions in CMS CMS supports all triparty instruction types: Lodge to initiate a triparty transaction for a given mnemonic/sub account Amend to increase or decrease the transaction amount Close to close the transaction The minimum transaction amount is 1,000,000 EUR/GBP/USD Instructions can be input for future dated execution (excluding BNY Mellon) 9

10 Account structures Example 1 Typically a Clearing Member will operate a single giver account to collateralise multiple business lines at LCH.Clearnet. LCH.Clearnet will operate a single taker account per Clearing Member. In example 1: From a single giver account the Clearing Member has opened 3 transactions for different amounts. Each transaction is booked to the relevant account with LCH.Clearnet. Each transaction is used to collateralise a different account with LCH.Clearnet Swapclear House; Swapclear Client ; and Repoclear House. The assets in the giver account must be proprietary since client assets must not be used to support house business. 10

11 Account structures Example 2 A Clearing Member may operate more than one giver account in order to segregate collateral pools. A segregated pool can be used specifically to collateralise a particular business line at LCH.Clearnet. In example 2: From the first giver account the Clearing Member has opened 2 transactions for different amounts. Each transaction is booked to the relevant account with LCH.Clearnet, in this example Swapclear accounts. From a second giver account the Clearing Member has segregated their repo desk collateral. This is used only to collateralise Repoclear business. The assets in the giver account must be proprietary since client assets must not be used to support house business. 11

12 Account structures Example 3 A Clearing Member and their client may wish to use triparty to collateralise segregated client accounts at LCH.Clearnet. However, currently the relationship between LCH.Clearnet and Clearing Member is principal to principal and cannot currently support the provision of collateral directly from clients to LCH.Clearnet. In example 3: A client who has an ISA account with both Swapclear and LME can use triparty via the Clearing Member to provide assets. The Clearing Member facilitates the segregation of assets for the client by providing a back-to-back account through which assets pass to the Clearing House and back using triparty. To support additional clients the Clearing Member would need to open additional triparty Giver/Taker accounts per client. 12

13 Contacts Enquiries with respect to triparty with LCH.Clearnet should be addressed to: Alternatively please contact your Euroclear, Clearstream or BNY Mellon relationship manager for more information. 13