BNP Paribas Securities Services is offering to manage collateral and central security depository (CSD) connectivity for clearing houses in Europe, ahead of incoming OTC derivatives rules.
Julien Kasparian, head of UK sales and relationship management, banks and broker dealers, at BNP Paribas Securities Services, said he has had advanced discussions with central counterparties (CCPs) to absorb some of their collateral management responsibility.
The service would allow a CCP to have an account with a CSD under its name for the safekeeping of posted collateral, yet managed by BNP Paribas, he said.
“We will open a clearing house account at the CSD level and we will monitor this account so that everything can be completely outsourced to us,” he said. “We work on behalf of the clearing house and move collateral, monitor activity and replace assets when necessary.”
CCPs in Europe are gearing up for the introduction of mandatory clearing of OTC derivatives trades – which will see buy-side firms post initial margin for the first time – under the European market infrastructure regulation (EMIR), after European regulators approved the first CCP in March.
The European Securities and Markets Authority now has up to six months to draft technical standards, and the European Commission and Parliament then have three months to approve the guidelines for the mandate to take effect, which could be as early as December this year.
Under EMIR, CCPs are required to hold posted collateral at a securities settlement system, or CSD, where possible.
CCPs could choose to connect directly to a CSD or outsource to a third-party. In the case of some clearing houses, such as LCH.Clearnet or Eurex Clearing, which operate as vertical silos, that connectivity is already in place.
Kasparian said BNP Paribas’ new service would allow CCPs to focus on their core business of calculating risk and making margin calls, and buy-side firms would know their collateral is safe at CSD level.
“CCPs could find themselves dealing with collateral transfers several times a day, or if there is a corporate action, for example, they would have to manage that as well – that is a lot of work for them,” he said.
“We will be able to move in and out the level of collateral that is required by the CCP automatically on their behalf. If it’s insufficient, we can simply look at additional collateral that could be switched over,” he said.
Collateral services
The OTC derivatives rules, coupled with Basel III requirements for banks to hold more capital have led to fears of a collateral shortage. As a result, a number of providers are offering services to help market participants to better manage their collateral across borders and asset classes.
BNP Paribas launched Collateral Access, an end-to-end suite of services for both buy- and sell-side clients, last year. The service is aimed at helping mitigate risk, optimise allocation and manage collateral, starting from trade affirmation and confirmation to collateral protection.
Kasparian said most buy-side firms are looking to outsource some aspect of their collateral management, as doing it in-house could become burdensome and costly.
“Market participants need to be flexible and make sure they have margin covered,” he said. “Many of them don’t know how much it’s going to cost to do it themselves, but they know exactly how much a third-party provider will charge them, so they’d rather outsource. Everyone is talking about it.”