The deadline for CAT 2 frontloading is fast approaching: have you quantified the impact of clearing?

The deadline for CAT 2 frontloading is fast approaching: have you quantified the impact of clearing?
9th February 2016 Maxime Jeanniard

The frontloading deadline for Category 2 OTC clearing (21 May) is just around the corner, prompting many to start anlaysing the most cost-effective way to cope with this new requirement.

As the provider of margin calculation software to both CCPs and Tier 1 banks, we are uniquely placed to help asset managers prepare for OTC Clearing. Here’s a great example of how we have just helped one of our investment management clients to work out the true cost of clearing.

  • Step One: We delivered a detailed report to the asset manager’s OTC clearing committee and fund managers to describe the specifics of each CCP’s margin methodology (base margin, add-ons, cross-product margining). This showed clearly how their existing strategies will be impacted by the clearing mandate and their choice of CCP.
  • Step Two: From position data supplied by the firm, we ran OTC margin calculations across CCPs (LCH, CME, Eurex) for all the funds impacted by the Category 2 mandate. The initial margin requirements varied by up to 30%, implying £100 million difference in the required initial margin.
  • Step Three: We ran more advanced simulations in order to assess the longer-term stability of the margin (post-backloading), using stress testing analysis to assess the stability of margin requirement. The fund’s Present Value varied by up to £500 million over a 5-day stress period (resulting in Variation Margin calls adding up to that amount) allowing the firm to assess the impact on overall asset allocation.

As mandatory “Category 2” clearing comes into effect, asset managers will need to determine the clearing strategy for the funds they manage: choosing which CCPs to use, which CCP services (e.g. account structures) they should register for, and the clearing brokers they will work with. The investment manager used this analysis to devise a clearing strategy that reduces collateral requirements. It also reduces the impact of central clearing to overall fund return, by optimally allocating past and future trades across CCPs and clearing brokers.

OpenGamma has a deep understanding of CCP OTC margin methodologies. Our unique insight into CCP margin methodologies is backed up with the ability to direct, quantify and compare margin with calculations on a fund’s own positions. To find out more about what we can do to help you prepare for mandatory clearing, visit our website or contact us for a demo.