Julian Eyre | published on 6th October 2017

Cleared and OTC Derivatives Transforming the Collateral Landscape

ISDA recently re-launched their annual collateral survey* to assess the collateral usage and make up within the derivatives market. This captures the 20 Phase 1 firms posting regulatory IM/VM on uncleared derivatives for the first time.

ISDA reports that collateral totalling $47 billion was posted and $47billion received for regulatory IM, compared to $16billion and $60billion respectively for discretionary IM. This reflects the one-way credit support documentation likely to be in place for non-phase 1 firms – where they mostly require IM to be posted to them by non-phase 1 firms.  In addition, these firms saw $870billion received and $685posted for VM.  As more firms are caught with regulatory IM requirements the regulatory figures are likely to grow.

The makeup of collateral posted is also interesting.  Regulatory IM is all non-cash – 86% Government Securities, 14% ‘Other’, 0% Cash, with Discretionary IM 47% Government Bonds, 28% ‘Other’, 25% Cash.  It appears the Phase 1 firms prefer Government Debt to Equities and no one is posting cash.  Given the segregation requirements for Regulatory IM, and fewer opportunities for rehypothecation, seeing this makeup – with no cash, isn’t a surprise. The overall percentage reduction in Other types of collateral is interesting, especially given the broader collateral use in other product areas.  The drivers for this are likely to be a combination of factors around the firms RWA calculation, flexible collateral costs not being priced in to trades, the firm’s policy, contractual arrangements, triparty custodian choice (with some having a lean towards certain security types) and the businesses operating model.

With the Phase 1 firms sticking to a reduced collateral schedule, will this have an impact on firms caught by later phases of the IM rollout?  It is likely that a firms overall collateral strategy and derivative business target operating model will become increasingly important in dealing with this evolving collateral landscape to maintain flexibility and competitiveness.

For further information, talk to us about how we can help with your collateral strategy, target operating model and IM repapering processes.

http://thefieldeffect.co.uk/services/clearing-collateral-strategy/initial-margin-variation-margin/

*https://www2.isda.org/functional-areas/research/surveys/margin-surveys/