05 B-Presentation DTCC

8/10/2019 05 B-Presentation DTCC

1/17

DTCC

Global Initiatives and Collateral Processing

November, 2013

Mark Jennis, Strategy and Business Development

John Straley, Strategy and Business Development

1[Classification]


2/17

One of the leading post-trade market infrastructure organizations in the financial services industry, standing at thecenter of global trading activity.

For 40 years, have played a critical role in reducing risk and protecting the global financial system, while

delivering cost efficiencies and innovative post-trade solutions.

User-owned, provider of clearing, settlement, asset servicing, global data management and information servicesacross multiple asset classes.

Process securities transactions valued at approximately US$1.6 quadrillion.

Provide custody and asset servicing for securities issues from 131 countries and territories valued at US$37.2trillion.

Global trade repositories record more than US$500 trillion in gross notional value of transactions made worldwide.

2

Who are we?


3/17

3

Capital & liquidity requirements under Basel III / CRD IV

Clearing of OTC derivatives under Dodd-Frank & EMIR

(Margining) discipline

Collateral rules and restrictions

Collateral monitoring by CCPs

Access to sources of liquidityGlobal

Complex

New

Facing a collateral revolution

3


4/17

4

transactions volumes

- Margin calls in OTC derivatives between 500 and 1,000 per cent?

demand for collateral

-US$800 billion? US$4 trillion? US$10 trillion?

interconnected players and segments

need for transparency

need for communication standards

operational risks

costs (incl. cost of funding)


4

Market participants facing more


5/17

5


and more interconnectedness

Commercialbanks

Repo

Central banks

Reservemanagement

Open-marketoperations Repo, SecLending

Collateral

CCPMargin Margin

Corporatetreasurers

Repo,SecLending

Repo

MarginMargin (quad-party)

Investmentbanks

Commercialbanks

Buy-SideAgent/Custodian

CCP GC

5


6/17


7/17

During extreme market stress the volume and value of margin callscan increase exponentially

Lack of process and certainty around intra-day obligations and

settlements can magnify intra-day exposure and funding squeezesduring extreme market stress

Lack of transparency around collateral obligations and settlementsleaves counterparties prey to rumors or partial information whichcan cause market reactions that make life very difficult for policy-makers and overseers attempting to manage a crisis

Lack of full understanding of available collateral and ability to bringit to bear when needed during market events exacerbatescollateral shortfall issues and challenges

Margin processing

7

Non-STP margin processing creates systemic risks


8/17

8

8

The end-state?

Regulators taking aim at market stability, resilience &transparency

Market participants confronted with increase in transactionalvolumes and risks

Collateral Supply/Demand questions are inevitable

Optimal collateral management requires greater integrationacross products, asset classes and geographies

Tremendous opportunities for improvement all along the trade& post-trade processing chain


9/17

Uses ofCollateral

Underlying exposure OTC Derivatives Margin Listed Derivatives Margin

Repo Sec.Lend CentralBk credit

Bilateral Cleared F & O Cash

CollateralManagement

Collateralscreening

CollateralValuation

ExposureMatching

CollateralOptimization

Collateralreporting

Custodians/ Agent Banks / (I)CSDs Central Banks

Cash $, , ,

Sources&

Settlementof

Collateral

9

Collateral management: a framework

InventoryMgt.

Settlementmonitoring

Securities $, , ,

FoP SecuritiesSettlement

Cash-onlySettlement

DvP SecuritiesSettlement


10/17

10REFERENCE

DATA REPORTING

Solutions supporting 6 main steps:

1. Data & Deal Management

2. Margin Calculation

3. Margin Management

4. Collateral Optimization

5. Settlement

6. Record Keeping

And 3 more generic themes:

1. Reference Data to drive systemizedprocessing

2. Reporting at each stage of theprocess to keep control

3. STP processing to gain in efficiencyand mitigate operational risks

OTC Derivatives post-trade processing chain

Data/DealManagement

Data/Deal CaptureData/Deal Validation & deal MatchingPortfolio Reconciliation

MarginCalculation

Trade valuationsExposure Calculation & Portfolio MarginingMargin Calculation

Margin

Management

Margin Call Messaging

Dispute Management

Collateral

Optimization

Collateral sourcingCollateral transformationCollateral allocation

Settlement

Settlement Staging & NettingCash Settlement / Securities SettlementSecurities Segregation

Settlement Fails Resolution

RecordKeeping

Collateral Record KeepingCollateral ReportingCollateral Safekeeping

STP

10


11/17

DTCCDTCC Restricted (Red) Confidential Treatment Requested by DTCC/DTC/NSCC/FICC Pursuant to the Freedom of Information Act11

Margin Transit Objective, Scope and Drivers

Data Validation & Deal Matching

Data Capture

Portfolio Reconciliation

Margin Calculation

Position Aggregator & C ollateral Optimization

Dispute Management

Margin Call Matching & Messaging

Funding

Collateral Transformation

Settlement Staging & Netting

Securities

Settlement &

Segregation

Fail Resolution & Reconciliation

Collateral Reporting & Recordkeeping

Cash Settlement

ExposureCalculation

Margin

Management

(AcadiaSoft)

Collateral

Optimization&

Funding

SettlementServices&Recordkeeping

Objective: To develop a global straight-through processing solution, whichaddresses the substantial costs and risks (including systemic risks) of the

margin process for all OTC bilateral and cleared products.

Business, Risk and Regulatory Drivers

Regulatory changes, mandated clearing, and the new ISDA credit support

annex, are expected to increase margin calls and collateral settlement

activity by a factor of 5-10.

Managing the settlement of payments has become a major pain point.

Treasury/funding managers are concerned about the lack of transparency

and certainty regarding the settlement of daily margin obligations.

Desire to leverage the global trade repository for portfolio reconciliation,

margin calculation, and regulatory reporting.

Increased concerns about managing the growth of segregated accounts

for initial collateral.

Non-STP margin processing creates considerable systemic risk, particularly

during financial crises.

In Scope

Margin TransitOut of Scope

Margin Transit

MBS Forward Trade Matching & Repository

Margin Calculation/ Aggregation


12/17

Margin Transit:Straight-Through Processing of margin calls

Matching Engine for DerivativesMargins

Matching Engine for DerivativesMargins

Transform matched/calculated margins to settlement instructions(for cash transfers and securities pledges/segregation); enrichwith SSI data.

Multilaterally net cash payments

Receive negative affirmation from Custodians/Nostros Send Pledge/Transfer/Payment instructions to relevant platforms

at established settlement timeframes Effect necessary collateral reporting

Transform matched/calculated margins to settlement instructions(for cash transfers and securities pledges/segregation); enrichwith SSI data.

Multilaterally net cash payments

Receive negative affirmation from Custodians/Nostros Send Pledge/Transfer/Payment instructions to relevant platforms

at established settlement timeframes Effect necessary collateral reporting

Margin Transit Collateral Processing Utility

Products Supported: Derivatives - bilateral and cleared Repo/Reverse Repo Mortgage Backed Forwards Futures and Options

Collateral Types Supported: USD Cash

US Securities (Government &Corporate)

Euro Cash Non-US Securities

Market Participants Supported: Dealers Futures Commission Merchants

(FCMs) Buy-side Firms Investment Managers Custodians Administrators

Matched Derivatives Margin Calls

Non-US Securities

Central Bank Payment SystemsCentral Securities Depositories

Utility submits Net Settlement & Pledge/Transfer instructions for all parties.

Pledge/TransferInstructions

Net SettlementInstructions

Status Status

DTC/Custodian

CSD/ ICSD/Custodian

FRBNY

ECB

Euro Cash

12


13/17

DTCC-Euroclear Memorandum of Understanding

Objectives

Assess the feasibility and potential opportunities to build and develop a cooperativerelationship to jointly offer collateral management services to DTCCs and Euroclearsrespective clients, and the market generally.

Considerations include the establishment of a link between certain existing collateral-related services and/or the development of additional services collectively referred toas the Linked Collateral Service.

Scope

Straight-Through-Processing of margin calls that have been agreed by partiesthrough an electronic matching service (e.g. AcadiaSoft).

Use Euroclears Inventory Management and Collateral Management technology acrossboth Euroclear and DTCC to allow seamless repositioning of assets between the EUand the US, including securities held in other asset holding locations that are part ofEuroclears Collateral Highway.

Linked Collateral Services

13


14/17

Need for some harmonization of practices within the diverseecosystem of funds, investment managers, custodians, centralbanks, commercial banks, treasurers and dealers;

Need for collateral fluidity and optimization.

14

Collateral management: Optimization & Settlement

CollateralManagement

Collateralscreening

CollateralValuation

ExposureMatching

CollateralOptimization

Collateralreporting

Custodians/ Agent Banks / (I)CSDs Central Banks

Cash $, , ,

Sources&

Settlementof

Collateral

InventoryMgmt.

Settlementmonitoring

Securities $, , ,

FoP SecuritiesSettlement

Cash-onlySettlement

DvP SecuritiesSettlement


15/17

Industry Value Proposition

Risk Reduction

Counterparty risks due to fails

Intraday funding and exposure

Elimination of manual processes in both margin and collateral mobilization processes

Increased transparency per linking collateral data w/ Global Trade Repository

Operations and Systems Cost Reduction

Operating and technology maintenance and development costs

Margin and settlement personnel Fail processing, compensation claim and credit overages costs

STP as a result of leveraging derivatives repository to calculate margin calls

Financing Cost Reduction and Balance Sheet Savings

Funding (a.o. transparency, netting, pooling of collateral resources)

Capital costs (a.o. less funding volatility, simultaneous settlement)

Shorten the margin lifecycle and collateral mobilization to same day

Increased Scalability, Capacity and Productivity

Meet Increasing collateral demand resulting from market and regulatory changes

Capacity to handle volatility of processing during times of stress

Centralized Economies of Scale by leveraging DTCC and Euroclear platforms15

15


16/17

1) During extreme market stress the volume and value of margin calls can increase exponentially The proposed linked service will create a centralized, automated front to back collateral process that provides a greater

capacity to handle high volumes of margin calls, a real-time view of margin and settlement activity that is visible by allparticipants, a secure communication protocol between constituents and standard reporting on-demand.

2) Lack of process and certainty around intra-day obligations and settlements can magnify intra-dayexposure and funding squeezes during extreme market stress

The proposed linked service will help reduce intra-day exposures and funding squeezes. Payment fails will be reducedsubstantially due to payment netting and simultaneous settlement during standard cycles through out the day, and direct

links to Central Banks and depositories will facilitate the more efficient and timely movement and safekeeping of collateral.

3) Lack of transparency around collateral obligations and settlements leaves counterparties prey torumors or partial information which can cause market reactions that make life very difficult forpolicy-makers and overseers attempting to manage a crisis

The proposed linked service will provide full transparency intraday regarding the status of margin calls and collateralactivity through standardized reporting. The collateral information will ultimately be linked to the derivative deal andexposure information which is part of DTCCs Swap Data Repository. This will allow regulators to be more proactiveduring a crisis and gain a better understanding of the scope and origin of a problem.

4) Lack of full understanding of available collateral and ability to bring it to bear when needed duringmarket events exacerbates collateral shortfall issues and challenges

The proposed linked service will provide for the seamless pooling and allocation of collateral regardless of geographiclocation or jurisdiction. This enables funding managers to have a more accurate view and control of their collateral supplyand to better prioritize the collateral obligations.

Systemic Risk Reduction

16


17/17

Questions?

Thank You!!!

17

05 B-Presentation DTCC

Documents