Collateral Management - Securities Lending Times

CounterpartyFocusBeing in the liquidity limelightSLT talks to Andrew Howat of LCH.Clearnet about what the centralcounterparty is up to in the run up to the collateral crunchMARK DUGDALE REPORTSWhere did LCH.Clearnet’s collateraland liquidity management businesscome from?One of our key focuses over the last 12 monthshas been to develop the collateral and liquiditymanagement (CaLM) services that we provide.Essentially, LCH.Clearnet takes all of the cashthat is placed with it for initial margining and investsit via repo. It also takes large amounts ofnon-cash collateral from clients to mitigate therisks that they bring in through the clearing services.Identifying and then providing a link betweenliquidity and collateral in the form of theCaLM service was quite intuitive.Our plan is to develop our CaLM service inFrance, refine the CaLM service in the UK, andbearing in mind that that we have just establishedan LLC in the US, we need to develop the CaLMservice in the US as well. We have a collateraland liquidity management strategy developingthere. We believe that collateral and liquiditymanagement will be a key differentiator for centralcounterparties (CCPs), so we are focusing oninternationalising and refining the CaLM service.What are you focusing on?An increase in cleared volumes as a result ofthe regulatory mandates will bring with it increaseddemand for the high quality collateralthat clearing houses require, so we are focusingon two important processes. Firstly, we are tryingto make our collateral service as efficient aspossible. Recently, some CCPs were being instructedto take and repay collateral via fax, It’s2012 and about time that manual practices areeliminated now front-end portals are available.We have also developed good solutions in termsof automation with the major triparty providersthat we think provide operational efficiency. Weare persuading our clients of the operationalbenefits of using triparty services, while maintainingthe choice for them to use single line lodgmentfor collateral. When we invest our money,we tend to use triparty services, so we are fullyaware of the efficiencies of that process. As apart of our more global expansion in the US, weare in active dialogue with vendors and providersto make sure that what they are developing forclients is something that we can accommodate.Secondly, whilst driving efficiency, we planto open up pools of collateral that historicallyhave not been commonly used. This has to bedone in an operationally efficient way and on atightly risk-managed basis too. Should a clearingmember default, the CaLM service dealswith the liquidation of collateral that has beenreceived, so we ensure that we have adequateliquidation services when the collateral that issupporting the trading has to be turned intomoney. Money-good assets are essential, butthere are some distinct boundaries in view ofcurrent market conditions as to what count asmoney-good assets. A CCP has make sure thatit has robust methods of liquidation, because itis the next default that we must always be preparedfor, not the historical ones.How much high quality collateral isthere up for grabs?There is a lot of high quality collateral out there,but we need to think strategically as to what elsewe can do. There is huge regulatory oversighton what they deem to be of the highest quality,and so appropriate to CCPs. We know thatwe are dealing with high quality collateral whenour own risk governance and regulatory authoritiesare all comfortable. It is always mutual, butwe would never suggest anything to them thatcould not be effectively risk managed by us.With mandated clearing, regulatory bodies8clearly have a view on the definition of highquality collateral, and it is not yet clear underthe European Market Infrastructure Regulationor the US Dodd-Frank Act what the outcome willbe. We are mindful of the requirements of ourclients, but we must maintain high standards ofrisk management.There continue to be areas of our existing acceptablecollateral grid that we can make moreefficient and open up. We have experience ofworking with both Euroclear and Clearstreamin Europe at the international central securitiesdepository level, so we have a lot of experiencein what types of collateral come from our clientsin these arrangements and what the challengesare of liquidation.We have a lot of experience in this area andin 2011 the average daily cash and collateralunder management was €73.1 billion. This is asignificant challenge to the CaLM service. Weinvest a lot of our daily liquidity through the repomarkets and are not seeing too much constrainon the capacity of that market. SLTAndrew HowatGroup head of collateral and liquidity managementLCH.Clearnetwww.securitieslendingtimes.com