For several years, CACEIS has offered a collateral management service for OTC derivatives, securities lending, and repo agreements. This solution, which allows the use of triparty collateral agents that are quite distinct from the depository function, has demonstrated its worth and benefits for operational efficiency, with a promising future in terms of regulation.
Frédéric Klehr, Head of Division Securities Financing and Collateral Operations, said: "CACEIS' collateral management via a triparty agent is an integrated service within CACEIS' Middle-Office solutions. It allows our clients, asset managers and institutional investors, to focus on their core asset management activities by effectively simplifying the operational management of their collateral and reducing settlement risks".
CACEIS' solution is of great interest for two reasons.
Firstly, from a regulatory perspective, it is fully in line with the continuing requirements for Initial Margin rules for non-cleared OTC derivatives transactions since 2015. With the 6th and final wave last September, which affects a larger scope of market participants, the need for triparty management will increase and contribute to a broad adoption of these models to manage initial margins.
Secondly, the European Commission published a Q&A* last July that puts an end to a regulatory ambiguity in Delegated Regulation (EU) No 231/2013 as amended by Delegated Regulation (EU) 2018/1618, which required reconciliations to be carried out "as frequently as necessary" between the custodian's internal accounts and records and those of any third party to whom custody has been delegated.
What did this mean when using a triparty collateral agent that is not the custodian?
The triparty collateral manager transmits end-of-day collateral positions on a fund-by-fund (or sub-fund-by-sub-fund) basis to its client. The client can thus verify that the quantity of financial instruments recorded in its books corresponds to the quantity of those held in custody. "But this situation, although in line with the custodian's delegation requirements, did not correspond to the aforementioned regulatory requirement, which required not end-of-day positions but reconciliations as frequently as necessary," says Eliane Méziani, Senior Advisor-Public Affairs.
Fortunately, after lengthy exchanges between the regulatory authorities and representatives of the French association, France Post Marché (formerly known as AFTI), this point was clarified in the ESMA ‘AIFMD and UCITS Q&A’ updated on 20th July 2022. "This progress allows CACEIS, acting as collateral manager, to integrate end-of-day collateral positions in accordance with AIFMD and UCITS regulations", confirms Eliane Méziani.
"With these regulatory changes and the development of new technologies, the industrialisation of collateral management will allow us to continue to develop this quality service offered by CACEIS to its clients," concludes Frédéric Klehr.
