Citi sets out segregated collateral service
Citi’s collateral service is a response to Dodd-Frank and EMIR
As tough new rules requiring the collateralisation of OTC derivatives take hold in Europe and the US, Citi has retooled its OpenInvestor investment services to include segregated collateral custody accounts – a move the bank says will help mitigate counterparty risk and improve collateral efficiency.
Dodd-Frank in the US and EMIR in Europe both require that the majority of OTC contracts be centrally cleared, meaning that participants will have to put up collateral against the risk inherent in those contracts. The intention of the rules is to reduce systemic risk in financial markets and prevent a recurrence of the financial crisis. Under the new service, Citi will act as an intermediary between the pledger and the secured party, holding pledged collateral in a segregated custody account.
“The possibility that every OTC relationship may need collateral accounts under new regulations has driven client demand for more efficient solutions,” said Chandresh Iyer, head of investor services at Citi. “These services draw upon our understanding of relevant business issues to streamline the technical and operational challenges of managing all types of collateral assets across multiple counterparties.”
The tools included in the collateral custody solutions include automated substitution control, designed to maintain collateral values above the agreed initial margin level, collateral monitoring that includes eligibility testing, concentration limits and haircut schedules, and margin manager cash reinvestment, which reinvests cash collateral into money market funds through a central online portal for customers with US dollar onshore accounts.
Concern among financial services firms that there will not be enough collateral to go round due to the new rules, including Basel III, has provided the inspiration for the launch of several new services in recent months.
In January, Citi established a set of alliances with Clearstream and Euroclear Bank that it said will transform the way broker-dealers manage their collateral. Meanwhile central securities depository Clearstream partnered with Belgian bank and insurance firm Belfius to develop a new collateral service for bilateral trades, focusing on OTC derivatives and aimed at corporates and medium-sized banks.
The technical standards for EMIR – the European Commission’s new rules mandating the central clearing and reporting of OTC derivatives – came into force on 22 March, meaning that CCPs now have six months to apply for registration. Once that takes place, a 90-day period will follow in which market participants are given notice that they must clear all products covered by the new rules. It is estimated that market participants will be bound by mandatory clearing obligations by Q1 next year.
