04 JanIntraday Liquidity. More clearing, more complexity for derivatives (Redux)
Humble apologies, a virus crept into the email of the latest post. I hope this is spam free!
With new rules coming into effect on Jan 1 2015, this is the first in a series of posts on how banks and FI’s might adapt.
Those FI’s who do not clear directly and opt for indirect clearing via the services of a Clearing Broker, can optimise by having one provider across Rates, Credit & FX.
For those who opt for direct access, there is little to optimise. Essentially, those institutions are “process takers”; they have to accept the rules of the CCP and the community and then ensure they have an effective and efficient process supporting that part of their operation. The one area that might offer some potential for optimisation is around the “PPS accounts”. These are the accounts that are linked to the direct debit process at the clearing house.
Some CCP’s, such as LCH, are quite flexible on which accounts are used and with which institutions, others, for example the CME, are less flexible. In the former case, an FI could consider having the PPS process connected to its main firm Nostro. In the latter case, the CME practice requires an account be held with one of a very small number of institutions, practically excluding the use of the main firm Nostro.
It is also likely that FI’s will need new controls to ensure that they are not long a position in one CCP and short an equal and opposite one in another CCP. To date, there is no inter-operability between the derivatives to remediate this. This really could happen. Imagine if all reference data was set up for a client and a counterpart and the two trades, buying from a counterpart and selling to the client, were processed straight through. If the SSI’s are different, you as the broker will find yourself long and short and paying Initial Margin (“IM”) in both.
Lessons Learned: Clearing is very much linked to cash management and intraday liquify management. Simple mantra: too many Nostros are a bad thing, new ones ought to be avoided wherever possible.
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