There are a multitude of tasks which need to be taken in the course of migrating a swap operation to a clearinghouse. This article speaks of three items which can be used to decide whether to onboard the position into a clearinghouse. At a minimum these tasks will shed greater light on the cost-benefit of onboarding to a CCP.
1) Transfer of bilateral swaps to cleared derivatives will require the posting of initial margin.
One of the first important decisions is the clearininghouse you choose and/or the bank you chooose to act as your clearing represenative, onboarding your trades into the clearinhouse.
2) In addition to eligible collateral, for the OTC derivatives one needs to know the Collateral & Haircut levels.
There are several other issues concerning Collateral:
COLLATERAL CONVERSION: s collateral conversion or repo desk and determine the cost so you can post the most cost effective collateral.
3) New Swaps Documentation:
3) Documenation: the bilateral documentation covering the swap originally will change once transferred to the clearinghouse. Attention should be paid to these legal ramifications.
- Cleared derivatives will be covered by SCSA between client and bank.
- Onboarding between clearinghouse and bank will flow through to the clearinghouse-facing agreement between client and bank.
- Special cares need to be taken with regard to how the clearinghouse is handling dilution in the event of bankruptcy or default. This is a post MF Global, PFG world.
Bilateral swaps positions should be analyzed prior to transfer for cost effectiveness and optimal risk mitigation
Lets’ say you have a swap to pay fixed for 5 years and another swap where you’re receiving fixed for 5 years. These swaps may look like good candidates for onboarding.
But if the CSA’s aren’t equal you may be better off keeping one or both of these swaps in the bilateral OTC world.
We’ll speak more on the topic of converting to Standard Collateral Support Annexes (SCSA) when at document is finalized.