Securities Services

Q2/2015

Index

> Securities Finance from SIX – solid as a rock – adaptable as mercury 01/02

> Handling bilateral relations in a transparent market 03

> Collateralising derivatives – tackling EMIR/FINfraG and uncleared derivatives 04

> Participant Profile 05

> Smart user guide 06

> Market Data 07

> Contact 08

No. 2 | July 2015

COLLATERAL & REPO NEWS

As we are all aware, the current macro-economic environment is becoming ever more challenging.

In addition to regulatory pressure, economic uncer-tainties require financial institutions to make quality decisions. A solution to the situation in Greece is still outstanding. Expectations that the Federal Reserve might adjust its monetary policy combined with rising geopolitical tensions emphasize the importance of reli-able, but nonetheless, adaptable solutions Securities Finance in.

Solid as a rockFor users of SIX Securities Finance products it is of paramount importance that the accuracy of margin calls is guaranteed on a continuous basis providing the highest degree of reliability in exposure coverage. The recently published Global Investor tri-party survey, confirms that SIX Securities Services is providing out-standing services in the areas of margin calls and on-time trade settlement. For the second year in a row, SIX was awarded best marks in these categories.

Securities Finance from SIX – solid as a rock – adaptable as mercury foreword by Nerin Demir, Head Securities Finance

SIX Securities Services | Collateral & Repo News | No. 2 | July 2015 02

In the light of the ECB’s QE program, the CH repo mar-ket has not experienced any drop in volumes to date. On the contrary, the emphasis of the Swiss National Bank on collateral quality and diversity in its baskets such as the changes undertaken in Swiss monetary policy on January 15th, might have been reasons for the market to flourish. With an average volume of roughly CHF 40 bn across the multi-currency seg-ments, the Swiss Repo market serves the repo com-munity as a reliable source of liquidity.

We listen and adaptWe continue to be proud that the settlement rate has been kept at 100%. This is currently of particular interest in relation to our “Special on Demand” ser-vice. The service enables participants in need of re- financing a specific security to request our customer service to upload a specific security on to the trading platform – usually within the same day. Lenders and borrowers may benefit from the broad range of secu-rities provided.

TCM by SIX – our collateral management solution – enables financial institutions to cover their exposure in real-time. Every exposure can be based on a differ-ent collateral schedule that individually reflects the risk profile of the relationship and hence the required collateral quality. As a consequence, customers can use our sophisticated structure of ordinary and escrow accounts in order to collateralize their individual busi-ness models. An institution with the need to collat-eralize derivatives and structured products with an intermediate central counterparty (CCP) may benefit from our partnership with CME.

Embracing changeOur products live and evolve. In the last two months, we beta-tested the new trading platform currently under development with a selected group of market participants. The feedback has convinced us to re-work and enhance the planned limit management facility which we are going to launch in 2016. It will contain a liquidity forecast, based on the trade inventory within the repo market. This will help participants to reduce the complexity of their trading decisions. The position view (roll-out 2016) shows repo traders the availability of assets instantly.

Ready for the futureWe have now combined our services and products into a single unit, we provide highly liquid markets and have now staffed the organization with an innovative team of product managers. A new chapter of our product chain is at its beginning. And it will help you with the challenges you are facing on the markets, today.

SIX Securities Services | Collateral & Repo News | No. 2 | July 2015 03

Repo trading is mainly driven by the bilateral nature of the counterparty relationship. This might explain why – even in the current environment – non-CCP cleared repos remain common market practice. Reg-ulators show an obvious tendency to require trans-parent pricing (EMIR, MiFid II) from financial institu-tions. And this can be seen in the share of repo volumes on automated trading systems (ATS) that is on the rise.

In the Swiss repo market, participants may initiate trades by the usage of indications of interest (IoIs) or addressed offers (AO). Even for quotes, they can restrict the set of addressed counterparties. Our research shows that in 83% of trading days, the ratio of trades initiated by quotes varies between 30% and 55%, whereas the mode (the most often observed ratio) is 36%.

The current trading system allows traders to negotiate on price (repo rate) and quantity (cash amount) by sending offers back and forth. From a certain point of

view, the phenomenon resembles a bilateral discus-sion (negotiation process). In other words: the conver-sation of two traders about the price.

The success of this market model is evident as the Swiss repo market obviously is very liquid. However, risk managers and regulators might seek a more trans-parent pricing process in the years to come.

The new trading platform will support a more sophis-ticated solution for bilateral price negotiations. Bilat-eral trading will be displayed in a separate set of panes and will lead the trader through the negotiation pro-cess. As the negotiation takes places electronically, it becomes easily auditable.

We will continue to emphasize the advantageous transparent bilateralism which continues to remain an important success factor of the Swiss repo market.

Handling bilateral relations in a transparent marketby Raphael Heuberger, Head Business Development

No. of days: quoted ratio of trades

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40

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20

10

0

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

No. of observations

SIX Securities Services | Collateral & Repo News | No. 2 | July 2015 04

EMIR and buy – side institutionsThe vast array of regulatory changes facing banks and the wider community of financial institutions and the buy-side in particular – from Insurance firms to Asset Managers – from Corporates to Pension Funds – has brought about a rethink of how the financial infra-structure is used in a new and increasingly complex environment. SIX Securities Finance has been at the forefront of supporting innovative solutions for the wider market in Switzerland and Europe. In particular the long expected European tightening of derivatives regulation – EMIR and the corresponding Swiss equivalent FinfraG are posing questions that require answers in the form of new concepts to support an increasingly complex collateral and derivatives clear-ing environment.

In particular, buy-side treasurers are under increased regulatory scrutiny to collateralize and, in some instances, clear derivative trades. TCM by SIX is now not only able to provide services for cleared deriva-tives but participants can also benefit from TCM col-lateral management services on a bilateral basis for un-cleared (OTC) derivatives in the form of FX futures via a prime broker setup.

The TCM service supports the freeing up of resources in the back-office whilst operational tasks such as margin processing and full collateralization of expo-sures are fully handled by TCM by SIX.

Challenges in a cleared environmentFor the past few years SIX Securities Services has been working closely with CCPs in Europe and with the Swiss insurance market to create an EMIR and FinfraG compliant platform that will manage the increased collateral management requirements in a more efficient manner, whilst offering one of the high-est forms of asset protection for the underlying insur-ance firms and their corresponding funds.

In order to achieve such a sophisticated protection model, SIX Securities Services has linked up with CME Clearing Europe in the first instance of its kind to offer an integrated collateral management service for the collateralization of the initial margin required in centrally cleared derivatives transactions like interest rate swaps and credit default swaps. Beyond this, SIX’s segregation capabilities continue to support both individual and omnibus account structures as various client needs require.

CCPs like CME Clearing Europe and SIX x-clear as well as ongoing discussions with other CCPs who are or want to hold collateral with SIX in the form of high quality securities on behalf of banks and institutional clients is further driving demand for this service that works equally for buy side institution but also banks and other regulated financial intermediaries.

Collateralising derivatives – tackling EMIR/FinfraG and uncleared derivatives by Nikola Todorovic, Head Sales and Relationship Management

Ordinary account

Collateral ProviderDirect SIX SIS Member

Collateral Management

Collateral TakerDirect SIX SIS Member

CCP/bilateral

Collateral pool

TCMpledged

Exposure order

1

2

3 4

5

Immediate Exposure coverage in a fully segregated account:1. CP moves securities to and from the Collateral pool by means of an account transfer (ATF)2. Exposure Instruction: LCH sends 1-sided Exposure Order to SIX via SWIFT (SWS as back-up)3. The exposure is covered in real-time based on the GCSelect algorithm and collateral schedule4. SIX monitors and manages the collateral, performing substitutions and corporate actions5. Reporting & Status Intimation from SIX to CT & CP via SWIFT, SWS Webbox and SECOM

SIX Securities Services | Collateral & Repo News | No. 2 | July 2015 05

NameDamian Imboden

CompanySwiss Life AG

Job TitleHead Treasury & FX

Participant Profile Please explain your role at Swiss Life AG? We are a small team responsible for the short-term liquidity management and the FX activities of Swiss Life AG, Switzerland. Transaction volumes in both areas are large. We have substantial foreign currency investments, given the restricted liquidity of the Swiss capital market, which we mostly hedge. Daily cash collateral calls of FX and IRS hedges are the biggest challenge for liquidity management, due to their unpredictable and volatile nature. Fortunately, the SNB granted insurance companies access to the SNB repo market in 2010. Since then, the repo market has become for us the perfect instrument for our liquidity management requirements. In addition, we are in- volved in various projects, e.g., implementing a central clearing set-up for OTC derivatives, which is consist-ent with regulatory requirements.

How and why does the tri-party setup make your life easier? The TCM is one of the core operative elements of the full physical segregation of the initial margin in con-nection with central clearing of OTC derivatives. This solution, which has been designed in cooperation with CME, SIX Securities Services and large Swiss insurers, allows us to transfer the initial margin directly to the CCP on a securities account with a Swiss insti-tution (SIX SIS) and to pool that the securities collat-eral we need for various purposes, i.e., repo, central clearing, pledges, etc. By having access to such a ser-vice, Swiss insurers are truly privileged relative to their foreign competitors.

How is your organization preparing for EMIR and FinfraG? We have started to prepare for central clearing since 2010. At that time we expected introduction of man-datory central clearing at a much earlier date. We quickly found out that using the standard clearing model offered by CCPs would put us in conflict with regulatory directives. Fortunately, EMIR implementa-tion has been postponed several times, as elaborating a solution, consistent with our regulatory require-ments, was a rocky and time consuming endeavor. Today we have a solution, which is consistent with insurance regulation and has substantial benefits for collateral management. We hope to implement the approach by year end.

SIX Securities Services | Collateral & Repo News | No. 2 | July 2015 06

Smart user guide

Upcoming important “Repo by SIX” technical newsDuring the coming months, your local IT support col-leagues will be actively making changes to your cur-rent connectivity setup. The upgrade takes place for the current trading platform and will remain for the new platform under construction.

The reason?We are introducing a new, state of the art framework for connectivity – FlexVPN.

What’s changing?The good news is that the difference will be a new software client – moving from a Cisco VPN client to a Cisco AnyConnect client. Otherwise you will connect in the same way.

We inform your IT department continuously with tech-nical service notices. However, please verify with your IT team whether they are aware of the upcoming changes and have reserved resources accordingly. Our IT support on repoinfodesk@six-group.com will be able to advise you through the necessary amend-ments. Once implemented, the trading user experi-ence will not differ.

Should you need any further assistance please do not hesitate to contact our Repo Infodesk:

+41 58 399 2190repoinfodesk@six-group.com

SIX Securities Services | Collateral & Repo News | No. 2 | July 2015 07

Market Data

CH Repo Market: Daily Average Outstanding Volume Q2/2015 in bn CHF

Overall Interbank Market

39.5 38.5

CHF EUR USD GBP

12.5 15.0 10.4 0.6

CH Repo Interbank Market – SIX Repo AG

45

01.05.14 01.07.14 01.09.14 01.11.14 01.01.15 01.03.15 01.05.15 01.07.15

45

40

35

30

25

20

15

10

5

0

Traded Volume in CHF (BN)

Polynominal (Traded Volume)

Polynominal (Outstanding Volume)

Outstanding Volume, T+O in CHF (BN)

Upcoming Events/Conferences/Training

Contact

– SIX Repo Training & Exam, Zurich, 16 September 2015 (German)

– SIX Repo Training new Trading GUI, Zurich, 17 September 2015 (German) – 2 sessions

– Bürgenstock conference, Geneva, 22 September 2015

– ISF Securities Finance Roundtable, Zurich, 22 September 2015

– 9th Annual Collateral Forum, Amsterdam, 1 October 2015

– SIX Repo Training & Exam, Zurich, 14 October 2015 (English)

– SIX Repo Training new Trading GUI, Zurich, 21 October 2015 (German/English) – 2 sessions

If you are attending any of these conferences and would be interested in meeting our representatives, please feel free to contact us in advance to arrange a personal appointment at the venue.

Although SIX Securities Services makes every effort to ensure the accuracy of this publication, neither it nor any contributor can accept any legal responsibility whatsoever for consequences that may arise from errors or omissions or any opinions and advice given. This publication is not a substitute for professional advice on a specific transaction. No reproduction without prior permission.

Repo InfodeskT +41 58 399 2190F +41 58 499 2488repoinfodesk@six-group.com