Eurex | Eurex Clearing
Eurex caught up with, Danny Foster, Head of Derivatives Clearing Sales at HSBC on the evolving role of collateral management transformation & collateral mobility
How is the landscape for collateral management changing?
We are seeing significant increases in collateral requirements, with a greater proportion of cleared activity taking place, as well as more counterparties coming under UMR and, therefore, needing to post margin bilaterally.
There are two aspects to this. One is the wider collateral requirement for clients, due to the increasing amount of activity that is going to clearing. The second is that more firms are now having to follow UMR. As a result, they are increasingly saying they may as well move to clearing, as they see it is a simpler model.
Next year, it is very likely that pension funds will no longer be exempt from clearing their OTC derivative transactions. So, those who have continued to either not clear at all, or only clear certain trades in their portfolio strategically, would now be required to clear all their eligible trades going forward.
Economically, some clients may have chosen not to clear because they determine that bilateral prices are better. Or the overall cost of remaining bilateral may still be more favourable to their portfolio. But we are also seeing clients saying clearing is far more efficient and an easier way to manage the portfolio -- both from a trading standpoint and operationally.
How is HSBC meeting these challenges?
With regards to the clearing business itself, we want to be able to add value to clients by providing them with greater insight into their collateral requirements.
On the OTC side, we have a real-time clearing offering to improve clients’ view of clearing activity risk. This includes tools for calculating margin requirements, based on new trades that they want to put on. Those new trades will then be calculated against the existing portfolio. The user then gets a margin requirement figure that is fairly close to what they will see on a T+1 statement rather than a cleared model.
Similarly, if you don’t run the calculation but clear your trade with HSBC, our portal will update and show what your initial margin utilisation will be, based on your current portfolio.
So that will give a good indication of what the collateral requirement will be for your OTC portfolio in real time. And what you can expect to see on your T+1 statement.
The idea is to help clients start positioning themselves and their collateral, and to decide if they may need to do some repo transactions to generate cash. Or, recall securities that may be out on loan through securities lending arrangements, which can be used to post as margin.
HSBC has also deployed a real-time clearing model for ETD as well. Our platform is now able to give clients a real-time risk view of their ETD portfolio. ETD has always been a T+1 model - you trade today and see your risk and margin requirement tomorrow.
Now, clients can see a real-time snapshot of their risk throughout the course of the day - based on the portfolio. From that, clients can see the margin requirements on T date for their listed portfolio. And again, it enables positioning for T+1. The user can generate cash and/ or position securities to meet their margin requirements. That insight into where the calls are going to be on T+1 is key for being able to look at wider collateral requirements across the bilateral space, with UMR, as well as from a cleared perspective.
With all this increase in demand for collateral, how much of a challenge is sourcing it going to be?
There is an ongoing industry discussion around broadening out from the traditional collateral set like govvies into posting other asset classes, such as equities. Obviously, that is not typically the case on the clearing side. But it is certainly something we are seeing in the market.
As more collateral is tied up for margin, it follows that there is less available for repo transactions or securities lending that could otherwise be used for revenue generation.
Then we come back to the question of access to liquidity in the event of market stress. Clients are looking at multiple tools to address this. These include bilateral repo (where they hadn’t had those relationships before), cleared repo (where there is increased dialogue) or a secured repo line.
While banks only have so much balance sheet they can extend within their risk limits to clients in these products, firms will look to other sources of liquidity such as the capital markets.
What lessons have recent bouts of volatility taught the clearing industry?
We have seen significant volatility over the last couple of years.
At the outset of the pandemic, that led to higher margin levels being called. Clearing houses have adjusted their margin methodologies, accordingly, to mitigate spikes during market stress events. Nevertheless, margin levels are higher overall, leading to increased demand on the collateral pool that is available in the market.
That brings firms back to the challenge of optimising their collateral. Clients are looking at various tools. It is about having various options available to them to meet any liquidity challenges and collateral requirements.
Collateral management is becoming much more of a service. Whereas before, clients just covered margin calls, now it is becoming an industry in itself.