BNY-BAML tri-party link eases buy-side collateral pressure

Asset managers will be able to use corporate bonds as collateral for centrally cleared interest rate swaps after a link-up between custodian bank BNY Mellon and Bank of America Merrill Lynch through CME Clearing.

Asset managers will be able to use corporate bonds as collateral for centrally cleared interest rate swaps (IRS) after a link-up between custodian bank BNY Mellon and Bank of America Merrill Lynch (BAML) through CME Clearing.

The arrangement lets BAML, acting as a futures commission merchant (FCM) post eligible securities on behalf of buy-side clients into a CME Clearing-controlled tri-party account at BNY Mellon to receive margin credit for listed futures and cleared IRS instruments, under the CME program known as IEF4.

The IEF4 program and the subsequent tie-up between BNY Mellon and BAML is designed to provide the buy-side with greater ability to use existing assets as collateral to centrally clear OTC derivatives in line with post-crisis regulation within the US Dodd-Frank Act.

Sam Jacob, global head of segregation, liquidity and aggregation products for BNY Mellon’s Global Collateral Services business, said the IEF4 program would improve buy-side collateral flow to FCMs and onwards to central counterparties (CCPs), easing the transition to a the cleared swaps environment.

“The IEF4 program provides a cost-effective option for the buy-side to leverage corporate bonds that they already have in inventory to be used as margin posted for cleared trades,” Jacob told theTRADEnews.com.

“If you step back and think of it conceptually under the premise of highest and best use of assets, with the buy-side continuing to face challenges around utilising and mobilising assets, other than cash for margins, this is around driving performance,” he said.

BAML has already begun processing buy-side collateral through the link-up with BNY Mellon.

Jacob said the initiative was part of a number of services that would seek to improve overall buy-side access to liquidity and maximise use of existing inventory.

“This also offers capital efficiencies for the sell-side and collateral management efficiencies for the CCPs who may accept, manage and segregate these extended collateral types and while also effectively addressing their additional risk requirements,” he said.

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