26 July 2012

CONFIDENTIAL

Central Collateral Repository

 Protect Collateral 

 Reduce Risk

 Enable Clearing 

Steve Hurst

Kevin Walsh

Conceptual Overview – for discussion purposes only
The Landscape

• The traditional clearing model -- which relies on FCMs to 

protect customers’ collateral -- has suffered in the wake of 

MF Global and PFG. 

• The MFG and PFG debacles have shaken trust in the 

futures markets to their core. 

• Further, until investors can be confident that their 

collateral is as safe in a cleared environment as it is under 

an ISDA CSA in a tri-party custody environment, the swap 

clearing mandate will remain problematic.

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• MDR proposes that the efficiency, safety and soundness of 

the ISDA CSA tri-party custody model can be made scalable 

and replicable through the establishment of a Central 

Collateral Repository:

• Single-purpose entity operated by neutral third-party. 

• Captures and matches trade parameters in a consistent manner

• Maintains a secure database of portfolios that is sortable, 

reportable and available to both customers and regulators

• Aggregated collateral data pursuant to CPSS/IOSCO 

recommendations.

• Full segregation of customer funds

• Transparent view of collateral for customers, FCMs and regulators

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Solution: A Central Collateral Repository
• Service Bureau for FCMs

• utility model 

• no risk-taking activity

• Repository holds deposit accounts at custodian bank or trust company that is a 

settlement bank of the DCO.

• Rulebook defines relationships and responsibilities

• Rulebook supplants control agreements with custodians

• Custodians exercise no discretion in managing the accounts

• FCM business model is preserved

• FCM remains as the clearing member for the customer..

• FCM retains control over minimum margin requirements and position limits . 

• FCM outsources managing of customer custodial accounts to the Repository 

• Shared outsourced solution

• Leverage existing custody infrastructure to minimize cost

• Model could be expanded to cover customer collateral for uncleared swaps (not 

depicted in these slides)

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Key Features
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Customer 2

Customer 1

Call

Customer

FCM Assets

Call

Posting

C1

C2 

Collateral 

pool

Risk / IM

Risk / IM

DCO

Current “Omnibus” Futures Model

“Gross Omnibus” collateral pool, 

mutualized across all customers

“Net” Risk calculations, per 

customer

In this model the risk across clients is mutualized and the losses are shared. Trades from two or more 

customers are margined discretely, but the resulting margin requirements are aggregated at the FCM who 

calls each customer for their contribution to the asset pool and nets the flows between itself and the DCO.
Customer 3

Customer 1

Orders Customer

Assets FCM

Margin

Posting

C2 

C1

Collateral 

pool

DCO

Simple Version of Repository Model

Showing Relationships ( Not Flows)

“

This view shows an FCM doing business with two customers using the traditional FCM model while offering enhanced 

collateral protection services to customer 3 via the Repository. Customer 3 will pay a fee for this enhanced level of 

service . 

Book Entry

Pays & Collects

“Gross Omnibus” collateral pool, 

mutualized across two customers

Operational Commingling

with Legal Segregation

Customer 2 

Repository 

Sub- Account 

By DCO for 

FCM

Repository 

Customer 

Account

Initial 

and 

Excess 

Margin

Repository

Orders

Margin

Orders

C3

FCM Account at DCO

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Individual Account with

Physical Segregation 
Client 

of FCM

Repository

Client 

Custodial 

Account 

DCO/FCM 

Custodial 

Account 

[

FCM Cash Investment 

Income

Pays &

Collects

• FCM provides customer access to the Repository 

• Repository opens a custodial account for the customer at a trust bank that is also 

depository for the DCO.

• As the DCO calls for margin, Repository allocates funds to the DCO/FCM account. 

• As the DCO pays margin, flows work in reverse.

• All accounts are held at leading trust & custody banks that are DCO depositories

• Relationships and responsibilities as between customers, custodians, FCMs and 

DCOs are defined in a Rulebook approved by CFTC 

Simplified Flows

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Benefits for End Users

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•Bankruptcy – remote account

•Funds held by neutral intermediary not FCM

•Repository is not envisioned under 766 (h)

•Structural protection

•Funds held on deposit at leading trust/custody banks

•Rulebook defines rights and responsibilities of all participants

•Transparency

•Balances in accounts are electronically accessible by customers 

via established banking platforms

•Balances easily verifiable by FCMs and regulators
Benefits for FCMs

• A new collateral protection service offered to customers for a fee

– Maintain customer relationships and access to clearing

– Provide a “full-segregation” option for customers willing to pay for it.

– Enhance (not impair) the existing business model

• Cost efficiencies 

– Shared outsourced solution 

– Leverage existing custody platforms

• Restore trust and confidence in futures markets

– Address customer concerns about collateral protection

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Conclusion

•The MFG and PFG debacles have shaken trust in the futures 

markets to their core. 

•Farmers in Iowa who transact in futures should enjoy the 

same level of collateral protections that the largest 

institutional investors utilize in the swaps market.

•Until all futures market participants can be confident that 

their collateral is safe, the implementation of the swap 

clearing mandate will remain problematic.

•MDR proposes that the efficiency, safety, and soundness of 

the individually negotiated tri-party custody model can be 

made scalable and replicable through the establishment of a 

Central Collateral Repository.
END

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