In a recent DerivSource webinar on collateral efficiency, Matthias Graulich of Eurex Clearing, explains how firms are using cross-product margining to reduce their overall collateral demand, and the account structure requirements for doing this.
As regulators cracked down on counterparty risk following the financial crisis—mandating the central clearing of OTC derivatives and increasing capital and collateral requirements—firms were initially very focused on compliance. Now that these systems are in place, they are beginning to seek ways to leverage this investment and improve their capital efficiency.
Firms are increasingly looking at their derivatives business as a whole and at the possibility of cross-product margining—especially netting between listed and OTC derivatives—to reduce their overall collateral requirements.
Hybrid products—deliverable swap futures or other types of futurised swaps such as those products offered by GMEX—are going to be of particular interest. Firms can go from a traditional swap, with a 5-day holding period and 99.5% confidence level, to a more futurised product—which by nature of the regulatory framework is cheaper in terms of the margin requirement.
Firms need to look at their whole product spectrum as a portfolio—for example, look at the listed and OTC derivatives they currently use, as well as the hybrid products they might mix in the future—and then look at the offsetting effects between those different products. They get a positive offsetting effect not only when different products are going in opposite directions, but also if the tenor or currency of the products are different.
Taking all these elements into account, portfolio margining will reduce their overall margining requirements, and therefore have a positive impact on collateral demand.
This applies more to some counterparts than to others. If you are completely directional in a single currency, with a single tenor, then the idea of portfolio margining or cross-product margining is less relevant than if you have a portfolio where these different ingredients play a more material role.
However, there is a key caveat. For firms to perform cross-product margining across exchange-traded and OTC derivatives, they must use the same segregation model in both markets.
If you are using the individual segregation account structure for all your derivatives—regardless of whether they are OTC or listed—then it is exactly the same model, the same legal framework; everything is the same, and netting across listed and OTC products is not a problem. However, if you are using the gross omnibus account structure for listed derivatives and an individual segregated account structure for OTC derivatives, then it will not be possible to identify the positions belonging to you for the purposes of cross-product margining.
Eurex Clearing does not distinguish in its segregation models what products you clear or what market you clear, but you need to have products using the same model in order to net across them.
* To hear more from Matthias Graulich on the topic of collateral efficiency, please watch our On Demand webinar.