This roundtable is now on break and here is the half-time report.
BUYSIDE COMMENTS: Not all clients choose tri-party control agreements, but those who do understand that there are incremental costs and are willing to pay those incremental costs. The re-tooling of the market as a result of movement from bi-lateral to cleared OTC markets should be accomplished in a way that increases the risk to buy-side firms.
FCM & CLEARINGHOUSE COMMENTS: Individual segregation of collateral is not the only protection available to the buyside. Mandating that customers be given individual segregation rights will cost the industry (and, by extension, customers) a good deal of money, since the operational system is not intact to support individual seg accounts.
CFTC COMMENTS: CFTC is charged with protecting the public, not the various panelists interests per se. Congress just adopted a statute whose concern is to mitigate systemic risk – if we do not get this issue right, then the implementation of the Congressional mandates will have the opposite effect.
Existing clearing model is an omnibus system; buyside prefers a fully segregated model. Dodd-Frank that you cannot use one customer’s collateral to secure another customer’s position; and, you can not commingle customer property with dealer property (although, all swap customer’s collateral can be co-mingled). So, the CFTC has a hybrid model that it is considering for swap margin/collateral:
1) Customers post collateral on a gross basis;
2) On a daily basis, every clearing member sends information to clearinghouse regarding every customer’s portfolio information;
3) Based on that information, the minimum FCM collateral positions will be established;
4) The FCM will post collateral;
5) In the event of an FCM insolvency, the customer will be entitled to the value of the collateral for its set of positions and each customer will be treated separately.
6) The clearinghouse will have the opportunity to transfer the positions, but the clearinghouse must have the unfettered right to liquidate positions if that is in their best interests.
Described by buy side panelist as "legally segregated, operationally omnibus" model – good description.
Miscellaneous Discussion Points
1) INSURANCE FUND? There was an interesting idea presented of establishment of an insurance pool to protect the loss of collateral.
2) NEED FOR IMPROVED TRANSPARENCY And this was interesting – there needs to be improved transparency for the market to function properly – the clearinghouse needs to be able to see market risk of positions through the FCM and the customer positions with clarity, so that risk can be properly managed.
The second half will be all about costs – how much, how much, how much – from whom, from whom, from whom.