Prior to 2009, strict regulations did not exist on collateralized products. Over-the-counter derivatives were traded under an ISDA Master Agreement or long form confirmation

1. Buy Side Challenges in the Field
of Collateral Management
Marc Jahncke, State Street
May 28th, 2015

2. The Evolution of Collateral Management
Buy Side Challenges
Collateral Optimization
Industry Initiatives & Utilities
Agenda

3. Pre-crisis Era
• Prior to 2009, strict regulations did not exist on
collateralized products. Over-the-counter
derivatives were traded under an ISDA Master
Agreement or long form confirmation
• Not all swaps were collateralized
• Those companies that did collateralize trades
under a CSA did so based on terms agreed
between the two parties
• Very little initial margin was exchanged. IM
requirements were based on internal credit and
risk reviews of the counterparty
• Collateral management was viewed solely as a
back-office function
• A means to an end to trade certain products
• Operations were performed in silos on outdated,
retrofitted, or offline technology platforms
Back-office
function
Operating in silos
Minimal
regulation
Marc Jahncke, GLC Collateral Management Forum 2015
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4. • Post 2009, massive regulations hit the derivatives
market. Most notably Dodd-Frank in the US and
EMIR in Europe
• Companies rushed to consolidate their operations
and technology for a full view of the underlying
exposures and collateral positions
• The terms collateral optimization and
transformation begin to take hold as the future of
collateral management
• Margin call management becomes an important
operational step and is continuously changing due
to new players in the market and new regulations
(i.e., IM and VM, portfolio bifurcation, etc.)
Optimization
Transformation
Consolidation
Following the Crisis – Current State and Goals
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Marc Jahncke, GLC Collateral Management Forum 2015

5. • As more and more regulations come into effect
everyone needs to be able to move collateral
quickly and efficiently
• Automation and integration will be key for
companies with increasing collateral requirements
• Connection to various up and coming market
infrastructures will be vital in this setup
• Consolidated perspective on collateral sources as
well collateral needs has to be available to all
stakeholders at any point in time
Market
Infrastructure
Integration
Collateral Gatekeeper
Traditional
margin call
management
behind us
Future State of Collateral Management
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Marc Jahncke, GLC Collateral Management Forum 2015

6. The Evolution of Collateral Management
Buy Side Challenges
Collateral Optimization
Industry Initiatives & Utilities
Agenda

7. Region Regulation Product Client Types
EMEA ESMA
• ETF
• Securities Lending
• Repo
• UCITS
EMEA AIFMD • All collateralized products • Alternative Investment Funds
EMEA EMIR
• OTC derivatives
• Cleared swaps
• Asset Managers
• Pension Funds
• UCITS (EMEA)
• 1940 Act Funds (US)
• Investment Managers
• Asset Owners
• Insurance
• Re-insurance
• Banks
• Non-financial corporates
EMEA
ICMA ERC – Repo Margining Best Practices –
2012
• Repo
US Dodd-Frank Title VII
• OTC derivatives
• Cleared swaps
US
TMPG (Treasury Market Practices Group)
Agency MBS Recommendation
• Forward-settling agency MBS (TBA,
CMOs, Specified pools)
Global
Basel (BCBS) / IOSCO Rules for non-cleared
margin
• OTC derivatives
APAC - Australia Corporations legislation amendment
• OTC derivatives
• Cleared swaps
APAC - HK Securities and futures ordinance
• OTC derivatives
• Cleared swaps
APAC - Japan
Financial Instruments and Exchange Act of
2010 / 2012
• OTC derivatives
• Cleared swaps
APAC - Singapore Securities and Futures Act of 2012
• OTC derivatives
• Cleared swaps
APAC - China Insurance regulatory commission • OTC derivatives • Insurance
Global Regulatory Impacts
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Marc Jahncke, GLC Collateral Management Forum 2015

8. Technology
Volume
Velocity
Expense
Reporting
Optimization
A bifurcated portfolio of CCP and un-cleared swap margining will
require dual processes. Substantial increase of collateral
transactions will put strain on current applications
Collateral in circulation estimated to increase due to enhanced
collateral requirements
The need to quickly mobilize collateral is increasing. There must
be an understanding of how much collateral is needed and
where it is required in a much more efficient manner than today
Clients will require more robust reporting capabilities from their
service providers, FCMs and CCPs
By optimizing collateral, clients are able to more efficiently
manage their asset inventory with the impending shortage of
high-quality, eligible collateral
Operational complexities will drive up cost and consequently
firms will look to outsource operations
Transformation
For those companies that cannot source eligible collateral
internally there is a need to transform or enhance their collateral
in inventory to higher quality eligible collateral
Industry Drivers
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Marc Jahncke, GLC Collateral Management Forum 2015

9. • Meeting new collateral demands
Increased volume of collateral in
circulation
Increased frequency and number of
margin calls
• Trade reporting
• Potential high quality, eligible collateral
shortfall
Pre-trade analytics
Collateral optimization
Collateral transformation
Consolidation of collateral operations
Efficiently managing asset inventory
using collateral optimization rules such as
cheapest to deliver
Ability to perform what-if scenario
analysis on a pre-trade basis
Implementation of various market
infrastructures
From collateral management to collateral eco-
system
Addressing Challenges
Key Challenges
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Marc Jahncke, GLC Collateral Management Forum 2015

10. • Central Clearing
• Implementation of un-cleared swap
margin rules
Global fragmentation of rules (US,
EMEA, APAC)
Calculation of IM (model vs. standard
schedules)
Segregation of IM
Possible currency silos to avoid
additional haircuts on collateral
4 year phase-in from Sep 1st 2016 – Dec
1st 2020
Re-negotiation, re-papering of CSAs
to include new regulations
Ensure systems are enhanced
to include new terms and
calculations including margining
at currency level
Implementation of initial margin
model using SIMM as template
(ISDA model)
Addressing Challenges
Key Challenges (continued)
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Marc Jahncke, GLC Collateral Management Forum 2015

11. The Evolution of Collateral Management
Buy Side Challenges
Collateral Optimization
Industry Initiatives & Utilities
Agenda

12. What is collateral optimization?
• Collateral optimization is the process by which a firm decides how best to allocate its collateral held in
inventory to individual collateral requirements. These decisions are made on an automated basis and
involve the following parameters:
– Collateral requirements (product agnostic)
– Eligibility criteria along with haircut schedules and concentration rules
– Asset inventories
– Collateral pledged or held
– Optimization rules such as ‘cheapest to deliver’, minimize settlement costs, longest maturity,
ratings hierarchies
Why is collateral optimization important?
• Due to increasing regulations in the derivatives market, it is likely that there will be a shortage of high
quality collateral available in the marketplace. Collateral optimization provides a way to efficiently
manage clients’ collateral inventories against their margin requirements
Collateral Optimization
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Marc Jahncke, GLC Collateral Management Forum 2015

13. Outputs
Reporting Transaction Management
Optimizer
Rules Engine
(algorithms)
Asset Inventory
Allocation
Inventory
Management
Substitutions and
Rehypothecation
Collateral and Custody System Inputs
Collateral
Pledged/Held
Collateral
Requirements
Agreement Terms Collateral Inventory
Optimization Flow
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Marc Jahncke, GLC Collateral Management Forum 2015

14. The Evolution of Collateral Management
Buy Side Challenges
Collateral Optimization
Industry Initiatives & Utilities
Agenda

15. • Electronic Margin Call messaging
• Secure transfer of collateral calls
integrated into collateral systems
• Increased automation, reducing manual
process and error
• Provides real time visibility into any
dispute and exposures
• Robust reporting and dashboard views
AcadiaSoft
• Post trade infrastructure initiative
• Industry utility providing proactive
reconciliation services mitigating disputes
between parties
• Mitigates manual processes through
automation of dispute management and
reconciliation with the counterparty
online, in real time
TriOptima
AcadiaSoft and TriOptima
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Marc Jahncke, GLC Collateral Management Forum 2015

16. Matching engine for
margin calls
Create margin call
record (per entity)
Enhance matched and
calculated margins to
settlement instructions
(use of SSI’s, LEI’s)
Send pledge, transfer
and bilateral payment
instructions to
custodians, depositories
etc. upon enrichment
Receive and record
settlement status
Report the collateral
activity and positions
DTCC Margin Transit Utility (MTU)
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Marc Jahncke, GLC Collateral Management Forum 2015

17. Consolidates users’ assets under a single inventory and
collateral management system
Optimizes and allocates mutual assets meeting
exposure requirements in the EU and US regions
Assets will remain on the books of depository, while
accounts are opened in the other depository
Collateral allocations and settlement obligations will
fully integrate with the relevant depository
Reduces settlement failures and bottlenecks in the
collateral management process
Collateral
Management
Utility
DTCC/Euroclear Collateral Management Utility (CMU)
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Marc Jahncke, GLC Collateral Management Forum 2015

18. Q&A
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Marc Jahncke, GLC Collateral Management Forum 2015