The wickedly slippery slope of new collateral acceptance

BNY Mellon lowered the practical, operational boom today on a new round of collateral acceptance for Futures Commissions Merchants (FCMs) on the CME. The CME had announced the acceptance of corporate bonds down to a A- rating effective March 12, but a new press release from BNYM ups the ante by making the opportunity more publicly known to FCMs and their clients using MarginEdge(SM), BNYM’s global derivatives margin management service. While Finadium looked at the implications of the CME’s new acceptance policies in our March 2011 report (Corporate Bonds and Equities as High Quality Assets for Collateral Management and Bank Balance Sheets), we think this press release will spark a new cycle of interest in the matter, leading ultimately to more corporate bonds used as collateral on CCPs worldwide. We’re expecting a mini-arms race here amongst CCPs but worry about the potential risk management implications.

BNY Mellon to Allow Market Participants to Post Corporate Bonds and Wide Range of Collateral for Futures and Cleared Swaps Margins at CME Clearing
FCMs to Use MarginEdge(SM), Company’s Derivatives Margin Management Service

NEW YORK, April 11, 2012 /PRNewswire via COMTEX/ — BNY Mellon, the global leader in investment management and investment services, will begin allowing futures commission merchants (FCMs) to post a wide range of collateral, including corporate bonds, for futures and cleared swaps margins at CME Clearing. FCMs can post the collateral via the CME IEF4 program using MarginEdge(SM), BNY Mellon’s global derivatives margin management service.

CME Clearing now accepts corporate bonds along with cash, government bonds, agency and mortgage backed bonds, money market funds, letters-of-credit, physical gold, equities, and bank deposits to collateralize transactions in the futures and the over-the-counter derivatives market. Through MarginEdge, market participants use BNY Mellon’s technology and expertise to post margins at CME Clearing while reducing risks and increasing efficiencies in the complex derivatives margin management process.

“As demand for non-traditional collateral grows at clearinghouses in the wake of regulatory reforms, it is critical that market participants have access to superior operational solutions and support to post and track their collateral,” said James Malgieri, head of Global Collateral Management and Securities Clearance Services at BNY Mellon Broker-Dealer Services. “BNY Mellon has for many years provided tri-party collateral management services for traditional repo transactions and has expanded the model to meet the requirements of the centralized clearing environment.”

“CME Clearing’s expanded collateral program will help create efficiencies for our customers who are migrating their OTC interest rate swaps into CME Clearing,” said CME Clearing President Kim Taylor. “By extending the range of collateral accepted, CME Clearing reduces the costs of clearing and creates further efficiencies for our customers and clearing members.”

BNY Mellon is one of the largest providers of outsourced derivatives collateral management services globally. It is a leading provider of tri-party collateral management services, servicing more than $1.8 trillion in tri-party balances worldwide.

BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. It has $25.8 trillion in assets under custody and administration and $1.26 trillion in assets under management, services $11.8 trillion in outstanding debt and processes global payments averaging $1.5 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation BK +1.82% . Additional information is available on www.bnymellon.com or follow us on Twitter @BNYMellon.