CCP Margin Exchange
26 April 2022
Russell Pudney, executive director for platform sales, securities services at J.P. Morgan, outlines the bank鈥檚 new product offering, a hybrid triparty solution for delivering efficient mobilisation of CCP margin
Image: Russell Pudney
J.P. Morgan鈥檚 latest product innovation leverages its proven triparty collateral management infrastructure to facilitate a single gateway for initial margin mobilisation across central clearing counterparties (CCPs). The product offering complements all collateral activities, delivering a centralised collateral management solution.
The new service addresses some of the key industry challenges, including:
increasing margin requirements at CCPs, resulting in highly manual and bifurcated processes and less-than-optimal outcomes;
鈥� increasing focus on scarce financial resources globally;
鈥� drive for cost efficiencies directing the industry towards standardisation, interoperability and digital transformation across the ecosystem;
鈥� increasing convergence across pre and post-trade driven by regulation, data access and granular cost allocation.
Traditionally, CCPs have preferred to receive collateral bilaterally and, in the past, triparty agents have tried to fit the CCPs in a "square peg into a round hole kind of way" by asking them to accept collateral via triparty, which they will do to a limited degree. But J.P. Morgan has moved to making its model fit the needs of the CCPs and clearing members by making the delivery to and from the CCP bilateral.
In line with their strategic pillars of asset mobilisation, collateral efficiency and investment in strategic architecture, and in response to clearing member feedback, J.P. Morgan Collateral Services has expanded its triparty service to include margin requirements at CCPs. By combining their triparty鈥檚 optimisation and eligibility engines with its bilateral collateral management capabilities, J.P. Morgan can move collateral bilaterally while still providing the benefits of robust optimisation, automation and the eligibility tests triparty offers.
The new service makes the delivery and return of CCP-related collateral, including intraday recalls and substitutions, substantially more efficient and, at the same time, provides economic benefits to the clearing members by replacing cash margin auto-debited by CCPs with securities margin.
Efficiencies are created when the clearing member outsources its daily margin interaction with the CCP to J.P. Morgan and the CCP sends the margin requirements on behalf of the clearing members to J.P. Morgan Collateral Services. When the relevant pool of collateral is accessible, J.P. Morgan manages that collateral against margin obligations, continuously adhering to the CCP鈥檚 eligibility requirements, the clearing member鈥檚 optimisation parameters and the CCP鈥檚 specific messaging protocols. When the CCP confirms the proposed assets, the service automatically delivers the asset in the market to the CCP. The management of collateral includes the ability to substitute securities at the CCP and replace cash margin with securities.
This solution eliminates two daily requirements: the front office task of selecting the optimal collateral; and the operational task of moving it back and forth across multiple CCPs, while eliminating the need to manage differing messaging protocols.
In designing this service, J.P. Morgan considered both house and client margin requirements and has founded the service to address house activity at launch with a roadmap for providing support for client requirements in the near future.
For house requirements, a traditional funded longbox approach is employed, whereby collateral is selected based on pre-defined algorithmic rules and the CCP鈥檚 eligibility schedule and matched up against the available pool of the clearing member鈥檚 collateral held in the J.P. Morgan longbox. This longbox may be shared with traditional repo, securities lending, pledge and Uncleared Margin Rule (UMR) activity.
For client margin requirements at a CCP, J.P. Morgan will integrate the existing capability to source collateral from internal or external custodial locations with triparty functionality. This eliminates the need to change standing securities instructions (SSIs) with underlying clients.
The first clearing member client went live on CCP Margin Exchange in 2021 and the solution is now actively delivering efficiencies for sizeable initial margin requirements at a major CCP. This allows the client to consolidate collateral inventory in a single location using the triparty engine to allocate in the triparty books and then systemically deliver the collateral bilaterally.
Ultimately, by providing visibility into repo, securities lending, pledge, UMR and CCP collateral activity, broker-dealer clients will have a consolidated view of their collateral obligations across various financing markets and trade types.
Collateral convergence
The CCP space is only one example of a use that benefits from the application of the convergence of triparty capabilities with bilateral movements. J.P. Morgan sees further practical opportunities in the exchange of variation margin, posting of segregated initial margin and also through having major application in the repo markets that predominantly transact bilaterally.聽The idea is that any transaction where bilateral movements are required or preferred can be managed more efficiently and effectively, in the converged triparty environment, than existing processes.
Ultimately, what convergence delivers to the collateral provider and receiver is the best of both worlds 鈥� the automation, optimisation and robust eligibility of triparty combined with the flexibility of bilateral market movements. It allows for a broader pool of collateral to be managed through one standardised process, instead of bifurcating triparty and bilateral activity into two workstreams.
By driving long-term partnership through scale, platforms and connectivity, J.P. Morgan鈥檚 goal is to be their clients鈥� 鈥淕lobal Collateral Partner of Choice鈥� through innovation, collaboration and transformation, creating a truly centralised collateral management solution.
The new service addresses some of the key industry challenges, including:
increasing margin requirements at CCPs, resulting in highly manual and bifurcated processes and less-than-optimal outcomes;
鈥� increasing focus on scarce financial resources globally;
鈥� drive for cost efficiencies directing the industry towards standardisation, interoperability and digital transformation across the ecosystem;
鈥� increasing convergence across pre and post-trade driven by regulation, data access and granular cost allocation.
Traditionally, CCPs have preferred to receive collateral bilaterally and, in the past, triparty agents have tried to fit the CCPs in a "square peg into a round hole kind of way" by asking them to accept collateral via triparty, which they will do to a limited degree. But J.P. Morgan has moved to making its model fit the needs of the CCPs and clearing members by making the delivery to and from the CCP bilateral.
In line with their strategic pillars of asset mobilisation, collateral efficiency and investment in strategic architecture, and in response to clearing member feedback, J.P. Morgan Collateral Services has expanded its triparty service to include margin requirements at CCPs. By combining their triparty鈥檚 optimisation and eligibility engines with its bilateral collateral management capabilities, J.P. Morgan can move collateral bilaterally while still providing the benefits of robust optimisation, automation and the eligibility tests triparty offers.
The new service makes the delivery and return of CCP-related collateral, including intraday recalls and substitutions, substantially more efficient and, at the same time, provides economic benefits to the clearing members by replacing cash margin auto-debited by CCPs with securities margin.
Efficiencies are created when the clearing member outsources its daily margin interaction with the CCP to J.P. Morgan and the CCP sends the margin requirements on behalf of the clearing members to J.P. Morgan Collateral Services. When the relevant pool of collateral is accessible, J.P. Morgan manages that collateral against margin obligations, continuously adhering to the CCP鈥檚 eligibility requirements, the clearing member鈥檚 optimisation parameters and the CCP鈥檚 specific messaging protocols. When the CCP confirms the proposed assets, the service automatically delivers the asset in the market to the CCP. The management of collateral includes the ability to substitute securities at the CCP and replace cash margin with securities.
This solution eliminates two daily requirements: the front office task of selecting the optimal collateral; and the operational task of moving it back and forth across multiple CCPs, while eliminating the need to manage differing messaging protocols.
In designing this service, J.P. Morgan considered both house and client margin requirements and has founded the service to address house activity at launch with a roadmap for providing support for client requirements in the near future.
For house requirements, a traditional funded longbox approach is employed, whereby collateral is selected based on pre-defined algorithmic rules and the CCP鈥檚 eligibility schedule and matched up against the available pool of the clearing member鈥檚 collateral held in the J.P. Morgan longbox. This longbox may be shared with traditional repo, securities lending, pledge and Uncleared Margin Rule (UMR) activity.
For client margin requirements at a CCP, J.P. Morgan will integrate the existing capability to source collateral from internal or external custodial locations with triparty functionality. This eliminates the need to change standing securities instructions (SSIs) with underlying clients.
The first clearing member client went live on CCP Margin Exchange in 2021 and the solution is now actively delivering efficiencies for sizeable initial margin requirements at a major CCP. This allows the client to consolidate collateral inventory in a single location using the triparty engine to allocate in the triparty books and then systemically deliver the collateral bilaterally.
Ultimately, by providing visibility into repo, securities lending, pledge, UMR and CCP collateral activity, broker-dealer clients will have a consolidated view of their collateral obligations across various financing markets and trade types.
Collateral convergence
The CCP space is only one example of a use that benefits from the application of the convergence of triparty capabilities with bilateral movements. J.P. Morgan sees further practical opportunities in the exchange of variation margin, posting of segregated initial margin and also through having major application in the repo markets that predominantly transact bilaterally.聽The idea is that any transaction where bilateral movements are required or preferred can be managed more efficiently and effectively, in the converged triparty environment, than existing processes.
Ultimately, what convergence delivers to the collateral provider and receiver is the best of both worlds 鈥� the automation, optimisation and robust eligibility of triparty combined with the flexibility of bilateral market movements. It allows for a broader pool of collateral to be managed through one standardised process, instead of bifurcating triparty and bilateral activity into two workstreams.
By driving long-term partnership through scale, platforms and connectivity, J.P. Morgan鈥檚 goal is to be their clients鈥� 鈥淕lobal Collateral Partner of Choice鈥� through innovation, collaboration and transformation, creating a truly centralised collateral management solution.
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