Initial margin segregation for uncleared OTC derivatives

Around the world, upcoming regulations such as EMIR and Dodd-Frank are imposing stringent margining requirements on OTC derivatives which will have a major impact on buyside and sellside customers. Clearstream’s Global Liquidity Hub offers initial margining services for both cleared and uncleared OTC derivatives from a single collateral pool.

Under the new regulations, counterparties will be required to exchange two-way initial margin on a non-netted basis for uncleared derivatives. Initial margin requirements in segregated accounts will be phased in from 2016 to 2020, depending on the average aggregate notional amount of uncleared derivatives.

Triparty margining services

The collateral needed for meeting the initial margin requirements for uncleared derivatives must be segregated at a non-affiliated third party custodian or triparty agent such as Clearstream. Clearstream’s account structure enables customers to hold multiple currencies and asset classes in a single location. The Global Liquidity Hub offers comprehensive triparty services for the segregation and management of initial margining for derivatives: the assets will be held in individually segregated accounts under a pledge structure in line with regulatory requirements. In addition, customers can benefit from standardised collateral baskets to meet the eligibility requirements of different regulations.

New legal master agreement

In addition to this advantageous operational setup, customers benefit from a simplified legal framework for the collateralisation of internal margin coverage. Clearstream offers standardised contracts, comprising a collateral transfer agreement and the Clearstream Pledge Conditions (CPC), for governing the exchange of initial margin within the triparty service. Similarly to the successful Clearstream Repurchase Conditions (CRC), the Clearstream Pledge Conditions facilitate the engagement with a wide range of counterparties that have accepted the CPC.

Together with the collateral transfer agreement, the Clearstream Pledge Conditions set out a common framework for the core terms governing the exchange of initial margin using the ISDA standard framework documentation for OTC derivatives. Additional terms such as concentration limits, eligible collateral and haircuts can be tailored to each counterparty on a bilateral basis.