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Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
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markets in coming years. Even the interest rate
swaps (IRS) market that is far more advanced than
the CDS market in their use of a central clearing
model has been moving only slowly toward broader
participation. In their triennial report, ISDA indicated
that as of mid-2013, 57% of all forward rate
agreements were centrally cleared and that 35% of
all IRS were centrally cleared. Rules requiring the
bilateral posting of noncleared derivatives are due
to take effect on January 1, 2015. This too will cause
demand for HQLA to surge.
At the very least, this shift in the OTC clearing model
is likely to provide an alternate outlet to absorb
unutilized lendable supplies if asset owners so desire.
Understanding the trade-offs of using HQLA supply
to post as collateral versus putting that supply into
a lending program will become a critical point of
consideration in the emerging environment. This will
have a major transformative effect on the securities
lending landscape.
“ We will need an additional $1T collateral for CCPs,”
— Securities Lending Consultant
“ We are likely to see some tightening in the collateral
situation in the next 6 months. It is not yet time to
hurry up and rethink collateral. People are not yet
breaking anything and market spreads are BAU,”
— Agent Lender
“ There are a lot of trades out there in the OTC world
that have yet to roll and the impact on collateral will
become more evident when they start to roll. This
could lead to the collateral squeeze that everyone
is concerned about,” — Industry Trade Association