Officials envision a staggering 900% growth in margin calls due the growth in the number of clearing houses, according to findings of a study done by the London School of Economics (LSE), according to the Depository Trust & Clearing Corporation (DTCC).
“With this clearing house fragmentation, individual clearing houses only will have pieces of a client’s portfolio and will not benefit from the full portfolio effect,” explained Mark Jennis, managing director, strategy and business development at the DTCC. “The results will be more volatility in margin requirements and more margin calls.”
Jennis added that by extrapolating current margin calls on bilateral arrangements- that has not been done before- with the rise of multiple clearing houses that support different products in different geographies and collateral that is moving to support underlying deals in different currencies, “you easily can see a 10-fold increase in margin calls.”
In preparation for that eventuality, the DTCC has been working with Euroclear to develop a joint venture that will address the buy- and sell-side’s needs for improved collateral management.
“We are close to the completion with the joint venture agreement and having regular conversations with regulators in the US, UK and Belgium,” said Jennis.
The new entity’s goal is to bring to market two new services, the Margin Transit Utility (MTU) and the Collateral Management Utility (CMU).
The MTU is being designed from scratch and will match margin, convert it into settlement instructions, send the instructions to the relevant parties, receive the settlement results and consolidate the transaction’s reporting.
The CMU, which will be based on Euroclear’s existing Collateral Highway offering for the European market, will use algorithms to determine which collateral is best to pledge based on rules set by the buyer and receiver, and allocate it to the appropriate clearing house.
“I like to think that MTU addresses the demand-side of the market on how to handle all the margin calls while the CMU addresses more of the supply-side of the market,” added Jennis.
The DTCC expects to launch the MTU offering sometime in the second half of 2015., but is keeping the CMU’s launch date close to its vest.
“The goal is to get CMU out sooner than later because of the growing numbers of clearinghouses and segregation requirements,” he said, declining to give a specific release window.