The triparty otc collateral condundrum

For large institutions the process of gauging whether you need to be complicit with BCBS / IOSCO 261 has started. For everyone else, you need to prepare and ensure you have a capability to meet the demands of collateral velocity and efficiency under the new regulations. This is something that cannot be done effectively or cheaply manually.

In our recent paper “Turning Up the Dial” we explored a holistic approach to collateral management and optimisation, and expanded on various themes; all interrelated to liquidity and capital management. Within this paper we suggest that Triparty facilities could be an integral part of the holistic model, enabling enhanced optimisation, settlement and control functions within the process, against a centralised inventory portfolio. We also explore the open question, “Why are market participants not using Triparty facilities as much as they could be for collateral management?”

Collateral managers see the merits of Triparty in providing a safe environment for managing repo flows, but they may consider rehypothecation as an issue for Triparty, thereby viewing this only as a mechanism to be used for managing mandatory independent amounts (gross initial margining) required under BCBS / IOSCO261 (BCBS261). Whilst banks may incorporate Triparty processes, smaller institutions and some CCPs may consider adapting their internal processes to Triparty position updates to be so expensive that it is uneconomic to do so. Both these conventional points may change: as demonstrably more counterparties utilise Triparty, rehypothecation within the Triparty system may become the norm, rather than the exception.

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