Finadium: Tri-party Repo in Asia: OTC Collateral Demand and Structural Change
This Finadium research report evaluates the market conditions that are pushing Asian investors towards repo as a mechanism for obtaining cash that can be used as OTC derivatives collateral, especially for trades with international banks. If repo becomes a popular vehicle for raising cash, this may result in a broader shift in Asia away from unsecured funding towards secured funding including both repo and securities lending.
The demand for OTC derivatives collateral is ramping up worldwide. In Asia, like everywhere, there are outstanding questions about how much collateral will be needed and where will it come from. Some of this will be determined by Credit Support Annexes (CSAs) between end-users and dealers: the more conservative the CSA, the more demand for specific collateral types, and vice-versa. The need for collateral to meet Initial Margin (IM) and Variation Margin (VM) requirements is one of the more difficult parts of the new rules for fully invested buy-side institutions.
The rules for delivering margin are complex, and there is no escaping the fact that for many Asian buy-side firms, there is both a learning curve and a need to either build up collateral operations or outsource the process to a service provider. This expertise does not currently exist at many thinly staffed firms, especially where operations has not been a priority focus area.
A growth in repo could have broad consequences for investors and service providers in the region, and result in new considerations for revenue generation and the management of underutilized assets. Investors and banks are looking at whether tri-party can be their platform for operational outsourcing and whether repo is a potentially preferred avenue for raising cash in the markets.
This report should be read by Asian investors across OTC derivatives, repo and securities lending, and their service providers. It may also be of interest to regional regulators.
June 20, 2016
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