Optimizing Collateral:
In Search of a Margin Oasis
Executive Summary
Change is coming to the swaps market. The movement towards exchanged traded, centrally cleared swaps will have a seismic impact on the $600 trillion global swaps arena. With the implementation of the Dodd Frank Act (DFA) and the European Market Infrastructure Regulation (EMIR) efforts US and European regulators are looking to mitigate risk through the mandatory introduction of |
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increased trading and reporting transparency and central clearing. These mandates come with some pretty hefty impacts; especially when it comes to collateral and collateral availability/scarcity. TABB Group believes that reform is going to have two significant impacts on the market. Namely, it will create a multi-trillion dollar shortfall in available high-grade collateral while at the same time driving up its costs and increasing the complexity of managing it.
To stay on top of these changes, traders are going to have to become ‘collateral smart’ very quickly. Optimizing collateral and the technology and services that drives it are going to become increasingly important, especially when you consider the added complexity associated with centralized clearing and daily margin calls. Innovative players who invest in optimization will be more able to unlock and cost effectively deliver new forms of collateral on an enterprise-wide basis. This investment process will separate the winners from the losers.
Tomorrow’s marketplace will be characterized by collateral innovation. Central counterparty clearing houses (CCPs) are already shaking up the marketplace by leveraging technology in an effort to attract new clients. Clearinghouses in both Europe and the US are already working hard to establish themselves as dominant players in the global derivatives clearing space. By offering portfolio management services, and increasing the types of collateral that can be utilized, CCPs are looking to capitalize on the changes that are coming while at the same time making the market more complex.
The TABB Group Vision Note Optimizing Collateral: In Search of a Margin Oasis is based upon conversations with swaps dealers, major swaps participants, end users and CCP participants, as well as, technology vendors. The report examines the impacts of swaps reform on collateral, as well as potential technological and service level solutions that participants are either looking to or seeking from the market place to help them manage the paradigm shift that is approaching.