Solutions

Collateralization

Dodd-Frank in the US and European Market Infrastructure Regulation (EMIR) in Europe, has led to a significant move to central clearing of vanilla OTC derivatives and the associated need to post margin to the central counterparties (CCPs). Even for non-cleared derivatives, financial institutions are moving to collateralize all their OTC positions, for reasons of both regulatory compliance as well as best-practices mitigation of counterparty credit risk. For buy-side participants, the most efficient use of assets, whether it is cash or securities given the various collateral requirements for different counterparties, is becoming a critical issue that impacts overall returns. And the CCPs and exchanges can gain a competitive advantage by applying cross-margining as much as possible, taking into account netting and cross-asset correlations, thereby requiring the least amount of margin from their clients (a.k.a. margin efficiency).

FINCAD can assist you with collateralization. We can provide the analytics needed to determine the optimal collateral to use and calculate the necessary margin requirements for your trades.

Determining the Right Collateral You Need To Ensure Efficient Management and Allocation

Determining the type of collateral and the currency of the collateral you should post is an important business decision. FINCAD provides the necessary analytics to handle OIS discounting, multi-currency CSAs and collateral optimization.

  • OIS Discounting - For portfolios that are fully collateralized in cash, the appropriate discount rate for valuation purposes should be the rate paid on the collateral balance by the collateral holder; often Fed Funds in the US, EONIA in Europe, or SONIA in the UK. FINCAD's curve framework ensures that a self-consistent set of curves is built in multiple currencies, taking into account the currency of the collateral.
  • Regession AnalysisMulti-currency CSAs - For portfolios for which the CSA allows cash collateral to be posted in one of a number of currencies, at the choice of the posting counterparty, the appropriate discount rate for valuation purposes depends on the Cheapest-to-Deliver (CTD) currency. Again, FINCAD's curve framework takes into account the terms of any CSA, and quotes for cross-currency swap spreads, when building the CTD curve.

  • Collateral Optimization - For multi-currency cash CSAs, FINCAD's CTD curve-building functionality also identifies the currency that provides the greatest economic return to the posting counterparty. Furthermore, for non-cash collateral, FINCAD's comprehensive bond analytics can form the cornerstone of a collateral optimization calculator.

Visibility into Margin Requirements of Your Portfolio

FINCAD can also assist in calculating your margin requirements–whether it's for pre-trade initial margin, intra-day or to compare potential future cash requirements.

  • Pre-trade Initial margin - FINCAD provides a flexible Value-at-Risk (VaR) framework that can be used to estimate Initial Margin (IM) on a pre-deal basis.
  • Intra-day Margin - While the CCP will provide a daily Variation Margin call, it is preferable to monitor the CCP's exposure on an intra-day basis to avoid surprises. FINCAD can be used to perform this exposure calculation.
  • Margin Simulation - For liquidity risk management, it is important to estimate the potential future cash requirements of margin obligations. FINCAD provides a scenario engine that can be used to simulate the CCP's net exposure to your institution, and tools to extract key statistics of the exposure distribution.

To find out more about the FINCAD's collateralization solutions, request a customized demonstration.

Collateralization - FINCAD Solutions