In response to new regulations in the US and Europe, which require over-the-counter (OTC) derivatives to be secured, centrally cleared and more transparent in future under Dodd-Frank and the European Market Infrastructure Regulation (EMIR), Citi has recast its Citi OpenInvestor suite of investment services to include segregated collateral custody accounts.
The financier says the move will help corporate clients wishing to hedge, although many of these may be exempt, and others participating on the financial markets to better mitigate counterparty risk, provide asset safety, and improve collateral efficiency, in line with the new rules.
Both EMIR in Europe and Dodd Frank in the US dictate that most OTC contracts be centrally cleared, although hedging corporations in the US have won an exemption from the central counterparty (CCP) clearinghouse obligations under Dodd Frank. The CCP requirement means that financial market participants will have to put up collateral against the risk inherent in OTC derivatives contracts. The idea is to cut systemic risk and prevent a repeat of the 2008 financial crisis, but even with the corporate exemption, the costs of using OTC derivatives will still rise under Dodd-Frank and will likely be passed on to corporate end users in terms of increased costs.
Citi’s new service will mean the bank acts as an intermediary between the pledger and the secured party, holding pledged collateral in a segregated custody account, acting like an established CCP. Citi has also established a relationship with Euroclear Bank and the other major European central securities depository (CSD) ClearStream, earlier this year as part of its preparations for the new EMIR regulations. Dodd-Frank is already underway in the US and EMIR started in March in Europe, with full compliance required by Q1 2014.
Covering tri-party account control arrangements (ACA), Citi updated service allows pledgors to instruct transactions on the collateral account and secured parties to monitor pledged collateral positions in a highly automated manner, assisting real-time analysis and risk assessment. The suite of new collateral custody solutions also offers other claimed benefits, such as:
- Automated Substitution Control: for rapidly changing collateral portfolios, this facility enables automated processing of substitution transactions whilst maintaining collateral values above the agreed initial margin level.
- Collateral Monitoring: for complex collateral portfolios, Citi can provide daily collateral monitoring that incorporates full eligibility testing, concentration limits and haircut schedules.
- Margin Manager Cash Reinvestment: for Citi clients with US dollar (USD) onshore accounts, Citi offers a program to reinvest cash collateral into money market funds (MMFs) through a central online portal.
“The possibility that every OTC relationship may need collateral accounts under new regulations has driven client demand for more efficient solutions,” said Chandresh Iyer, managing director 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.”
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