BNY Mellon Central Securities Depository SA/NV
BNY Mellon Central Securities
Depository SA/NV
Service Description
Triparty Collateral Management
Services
January 2015
BNY Mellon CSD
Public Limited Liability Company
Rue Montoyerstraat 46, B-1000 Brussels, Belgium
VAT BE 501 804 457 RLE Brussels
Tel: 00 322 545 4430
www.bnymelloncsd.com
BNY Mellon CSD SA/NV is a company incorporated and organised under the laws of the Kingdom of
Belgium.
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Contents
1
FOREWORD..................................................................................................................................... 1
2
OVERVIEW....................................................................................................................................... 2
3
GETTING STARTED......................................................................................................................... 4
3.1 TERMINOLOGY ............................................................................................................................... 4
3.2 DOCUMENTATION ........................................................................................................................... 5
3.3 SYSTEM OVERVIEW & ACCOUNT OPENING ....................................................................................... 6
3.4 COLLATERAL ELIGIBILITY ................................................................................................................ 8
3.4.1 Collateral Schedule / Rulesets ............................................................................................... 10
3.4.2 Collateral Eligibility Criteria .................................................................................................... 11
4
TRADE LIFE CYCLE ...................................................................................................................... 15
4.1 TRADE INITIATION ........................................................................................................................ 15
4.2 TRADE TYPES.............................................................................................................................. 17
4.3 TRADE CHANGES / MODIFICATIONS ................................................................................................. 17
4.4 ALLOCATION PROCESS ................................................................................................................. 18
4.5 VALUATION OF SECURITIES ........................................................................................................... 19
4.6 SUBSTITUTION & GIVE-BEFORE-YOU GET ........................................................................................ 19
4.7. CORPORATE ACTIONS ................................................................................................................. 20
4.8 TRADE CLOSING & REDELIVERY OF COLLATERAL ............................................................................ 21
5
MASTER DATA AND PRICE FEEDS ............................................................................................. 22
5.1 PRICE SELECTION PROCESS ......................................................................................................... 23
5.2 PRICE CHALLENGE PROCESS ........................................................................................................ 25
6
EVENT OF DEFAULT ..................................................................................................................... 26
7
CONNECTIVITY AND REPORTING ............................................................................................... 28
8
RECONCILIATION ......................................................................................................................... 29
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 1
1 Foreword
By offering triparty collateral management services, BNY Mellon CSD can leverage the global
capabilities of BNY Mellon as one of the leading providers of triparty collateral management services.
BNY Mellon conducted one of the first triparty repo transactions in 1985 and has been a leader in
global collateral management ever since. BNYMellon has built one of the most extensive collateral
management platforms, servicing $2 trillion in triparty repo collateral globally.
The triparty collateral management programme is designed to simplify collateralisation and expedite
securities transfers between collateral providers and collateral receivers. BNY Mellon CSD is
positioned between the principal trading counterparties to provide an independent, flexible and
efficient collateral management service which addresses critical aspects of traded or structured
activities requiring collateralisation. As a pioneer in the provision of global triparty collateral
management services, BNY Mellon offers user-friendly solutions to collateral receivers who are
seeking operational efficiency, while reducing investments in back-office infrastructure and
technology, which BNY Mellon CSD is able to utilise. We will oversee the independent determination
of securities’ eligibility and value, including the application of haircuts and concentration limits, to
monitor the collateralisation of each trade from inception to maturity.
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 2
2 Overview
In 2011, BNY Mellon undertook a strategic review of its business in Europe – taking into consideration
key EU regulatory changes, identifiable responses from competitors and changing client needs. The
conclusion was that BNY Mellon should acquire central securities depository (CSD) status in Europe
to:
defend our existing businesses;
reduce risk for our clients and ourselves; and
enhance our clients’ experience.
Following the authorisation for notary, settlement, and safekeeping services, BNY Mellon CSD now
offers triparty collateral management services. At a later stage, BNY Mellon CSD’s triparty collateral
management services will be expanded to cover:
triparty collateral management services for Central Banks of the Eurosystem
triparty repo services
BNY Mellon CSD leverages the existing system and operational infrastructures of BNY Mellon Group,
by outsourcing relevant triparty collateral management functions to The Bank of New York Mellon
SA/NV (‘’BNY Mellon SA/NV’’), pursuant to an inter-company outsourcing agreement.
In offering triparty collateral management services, BNY Mellon CSD can build on more than 20 years’
experience that BNY Mellon is a leading global triparty collateral management agent.
As the triparty collateral management agent, BNY Mellon CSD fulfills an essential facilitator role in the
collateral management process between collateral providers and collateral receivers, comprising, but
not limited to:
providing a highly automated and neutral service of selecting collateral deemed as eligible by
both collateral provider and collateral receiver;
enabling risk reduction for counterparties by providing independent agency services for daily
mark-to-market and valuation; and
providing a secure processing environment embedded into a highly regulated European
entity.
Benefits and core features of BNY Mellon CSD’s triparty collateral management services comprises:
free of payment settlement services;
auto allocation of securities collateral;
unlimited substitution facilities for collateral providers;
pre-record date monitoring and substitution processes where alternative collateral is
available;
highly flexible collateral eligibility maintenance;
multi-asset class capabilities;and
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 3
wide range of reporting and communication tools to allow full transparency during the triparty
collateral management lifecycle.
The following triparty collateral management services will be supported:
Triparty Collateral Management Services:
o
Various underlying deal types can be supported according to the principal agreement
that collateral provider and collateral receiver may have entered into, such as:
bilateral cash loans, ISDA/CSA margining, collateralisation of CCP margin
requirements, collateralisation of securities lending transactions, and others.
o
Characteristic for these underlying deal types is that the principal deal settles
bilaterally between the counterparties, but both counterparties report a collateral
exposure to the triparty collateral agent that will be covered via the triparty collateral
management system.
o
As the underlying deal can have different terms, the triparty collateral management
system supports open-ended and term trade types.
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 4
3
Getting Started
3.1 Terminology
The intention of this document is to provide a high level overview on the triparty collateral
management services offered by BNY Mellon CSD. It serves as a starting point between the legal
description of the service which is provided for in the Rulebook and the technical description of the
service which is covered in the technical user documentation. The Rulebook and the technical
documentation may utilise slightly different terminology. The below list provides an overview of the
different terminology that might be applied for the most common terms.
Rulebook Terminology
Technical Documentation Terminology
Collateral Provider:
The collateral provider may be referred to as the
“Dealer” in technical documentation.
means the person that has entered into a Participant
Adherence Agreement with BNY Mellon CSD, that is
the counterparty to the collateral receiver in respect of
a trade, and that is obliged under the terms of the
applicable Principal Agreement to provide eligible
collateral to the collateral receiver on the applicable
trade date and to maintain such eligible collateral on
each subsequent business day on which a trade
continues.
Collateral Receiver:
means the person that has entered into a Participant
Adherence Agreement with BNY Mellon CSD, that is
the counterparty to the collateral provider in respect of
a trade, and to which person the collateral provider is
obliged under the terms of the applicable Principal
Agreement to provide the relevant eligible collateral on
the applicable trade date and to maintain such eligible
collateral on each subsequent business day on which
a trade continues.
Deal:
means the transaction pursuant to the Principal
Agreement or Principal Agreements between the
collateral receiver and the collateral provider.
In the same context the collateral provider’s account
may be referred to as a “Dealerbox” in technical
documentation.
The collateral receiver may be referred to as the
“Investor” in technical documentation.
In the same context the collateral receiver’s account
may be referred to as the “Investor account” in
technical documentation.
The technical documentation is often agnostic to the
underlying principal agreement between the collateral
receiver and collateral provider and does not refer to
this underlying transaction. All examples and
descriptions in the technical documentation therefore
refer to the collateral management transaction itself
and not to the underlying principal transactions. It may
be confusing that the term “Deal” in the technical
documentation is often referred to as the collateral
management transaction that is handled in the BNY
Mellon triparty collateral management system.
The technical term “Deal” therefore refers to any
collateral management transaction that delivers eligible
collateral from the collateral provider (or “Dealer”) to
the collateral receiver (or “Investor”). In some parts of
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 5
Rulebook Terminology
Technical Documentation Terminology
the technical documentation, the term “Trade” might be
used as well to refer to the collateral management
transaction.
Trade:
means FOP (free-of-payment) transfer of securities
and transfer of securities as collateral in the framework
of a deal.
On each trade date, BNY Mellon CSD transfers eligible
collateral from the collateral provider’s securities
account to secure the exposure based on the
underlying agreement. Movement of securities is
specifically referred to as the allocation process to the
collateral receiver’s securities account in accordance
with the confirmation instructions for such trade.
As outlined above, the technical documentation will
often utilise the term “Deal” to refer to a collateral
management transaction that delivers eligible collateral
from the collateral provider (or “Dealer”) to the
collateral receiver (or “Investor”). Once a deal is
matched and confirmed in the triparty collateral
management system, the technical documentation may
refer to a “trade” as being the reflection of the collateral
management transaction in the system.
3.2 Documentation
To facilitate the account opening process, BNY Mellon CSD developed a lean documentation
structure. There is no requirement to have a triparty contract in place per underlying bilateral
relationship. Rather, triparty collateral management services are offered to collateral providers and
collateral receivers by entering into a Participant Adherence Agreement with BNY Mellon CSD (and
hence adhering to BNY Mellon CSD’s Rulebook) and in particular, Schedule III of the Participants
Adherence Agreement. The Schedule III is signed by collateral provider, collateral receiver and BNY
Mellon CSD as the triparty agent to determine the eligibility criteria for the triparty collateral
management trades.
By signing the Participant Adherence Agreement and completing a collateral schedule, participants
can establish seamlessly the necessary relationships for:
BNY Mellon CSD opening up the custody account(s) of all securities;
BNY Mellon CSD initiating the opening of cash accounts at BNY Mellon SA/NV; and
BNY Mellon CSD opening up the triparty collateral account(s).
The services provided by BNY Mellon CSD as triparty collateral management agent are independent
and agnostic of the provisions and obligations of the respective counterparties under the underlying
principal agreement. The terms and conditions for the triparty collateral management service offering
are described in Chapter 3 of the Rulebook “Special Terms and Conditions for Triparty Collateral
Management Service Offering”.
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 6
3.3 System Overview & Account Opening
The processing platform for triparty collateral management services is RepoEdge®/AccessEdge®.
AccessEdge is the front-end Web interface used to access RepoEdge. RepoEdge and AccessEdge
(collectively referred to as “AccessEdge”) are in-house applications of BNY Mellon Group. BNY
Mellon CSD will outsource relevant triparty collateral management functions in AccessEdge to BNY
Mellon SA/NV, pursuant to an inter-company outsourcing agreement.
AccessEdge is used to monitor collateral for which BNY Mellon CSD is the custodian. It has a direct
connectivity to BNY Mellon CSD’s settlement system. For participants that have signed Schedule III
to the Participant Adherence Agreement, BNY Mellon CSD will open up triparty collateral
management accounts in AccessEdge for collateral providers and collateral receivers.
The picture below provides an overview:
Whereby:
1:
Main custody account of the collateral provider in BNY Mellon CSD’s custody system called “GSP”
2:
Assets that shall be utilised for triparty collateral management purposes must be transferred to a BNY Mellon CSD
collateral provider triparty account in the custody system
3:
The custody position from the collateral provider triparty account is mirrored into the triparty collateral management
system of BNY Mellon CSD called “AccessEdge”
5 & 7:
Collateral receiver accounts in AccessEdge. Eligible collateral will be allocated from the collateral provider triparty
account to the collateral receivers’ triparty accounts.
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 7
4 & 6:
Only in case of default of the collateral provider, the collateral position held in the triparty collateral management
system on accounts 5) and 7) will be mirrored to the collateral receiver accounts 4) and 6) in the custody system.
The account opening process in AccessEdge enables full segregation.
All BNY Mellon CSD AccessEdge accounts are separated by a BNY Mellon CSD legal entity
code to separate them from BNY Mellon's ordinary business, such code drives legal entity
reporting obligations. Any assets held under an account designated BNY Mellon CSD will be
reported as BNY Mellon CSD holdings.
Each participant account will be set up with an additional field to identify the contracting
participant’s name (this will be in addition to the existing account name).
Each account can be set up with an identifier to differentiate title transfer accounts from
pledge accounts. In the initial phase, only title transfer accounts will be supported, but pledge
accounts will be added in the next step.
The picture below provides an overview on the pre-trading set up for triparty collateral management at
BNY Mellon CSD:
Whereby:
1
Both parties, provider and receiver, agree on the initiation of a triparty collateral management relationship. Each of
them separately sign the Participant Acceptance Agreement and shows agreement to the Schedule III.
2
The Participant Acceptance Committee (PAC)of BNY Mellon CSD approves acceptance of both Participants as a
requisite
3
Both parties, Provider and Receiver, execute the collateral schedule with the participation of BNY Mellon CSD to
confirm terms can be supported.
4
Pre-trading set up involves preparing for operational readiness by performing the listed tasks.
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 8
3.4 Collateral Eligibility
Collateral eligibility for the triparty collateral management services offering by BNY Mellon CSD is
determined via a layered process as described below:
1. BNY Mellon CSD as the underlying linked (I)CSD of assets in the triparty collateral
management services programme determines the eligibility of asset classes based on opened
(I)CSD links. In that sense, the overall assets eligible in the triparty collateral management
services programme are limited by BNY Mellon CSD to assets that can be processed in the
settlement system of BNY Mellon CSD.
2. BNY Mellon CSD as the triparty collateral management agent determines a list of asset
classes that can be operated in the triparty collateral management services programme.
Eligibility of asset classes is determined on a number of different criteria such as availability of
static and price data, liquidity of the asset class, operational processes and preconditions
required for the asset class or any regulatory provisions that might apply.
3. The collateral provider and collateral receiver agree on the draft terms of collateral eligibility.
Based on the available asset classes, the collateral provider and collateral receiver agree on
eligibility criteria to determine acceptable collateral. The triparty collateral management
system facilitates different types of criteria (concentration criteria, margin criteria, etc.) to be
combined into a so-called ‘’rule set’’ which determines the overall eligibility matrix. BNY
Mellon CSD as triparty collateral management agent reviews the draft terms of eligibility
criteria to eliminate unclear/ambiguous or unsupported eligibility terms. In this process, BNY
Mellon CSD also validates that the assets can be processed by BNY Mellon CSD as triparty
collateral management agent. Dual control is applied to the review process.
4. Upon agreement, the collateral provider, collateral receiver and BNY Mellon CSD as the
triparty collateral management agent execute the collateral schedule containing the agreed
terms of collateral eligibility.
As a triparty collateral management agent, BNY Mellon CSD always acknowledges these collateral
schedules and monitors that only collateral which meets the eligibility criteria is allocated. There is no
exceptional or unilateral modification of the collateral schedule. The process for modification of
collateral eligibility follows the same process as at establishment of the original collateral schedule
i.e., by providing written confirmations by collateral receiver and collateral provider to BNY Mellon
CSD as the triparty collateral management agent. Changes to the collateral schedule will be
supported by BNY Mellon CSD as soon as reasonably possible and upon its consent.
Where requested by the collateral provider and/or collateral receiver in exceptional circumstances,
changes to the collateral schedule can be activated with intraday effect in the triparty collateral
management services system. This does however not mean that within that timeframe all allocated
collateral meets the new criteria as the allocation will depend upon the available eligible collateral in
the collateral provider account. Should there not be sufficient "alternative" eligible collateral, then
substitution requests will have to be initiated. The "old" eligible collateral will not be released until
alternative eligible collateral is allocated.
As the picture below highlights, the triparty collateral management system supports different asset
classes. BNY Mellon CSD has outsourced to BNY Mellon SA/NV the determination of asset classes
that can be eligible for processing in the triparty collateral management system.
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 9
BNY Mellon CSD will limit the list of available asset classes based on its capabilities for custody and
safekeeping of assets.
At the beginning, BNY Mellon CSD will primarily support OECD countries debt instruments that are
eligible[1] in the CSD as listed below. In a second step, the service offering will be extended to cover
equity asset classes.
Broad Type
Fixed Income
Sub-Type
National Bond
Un-stripped National Bond
Supranational
Stripped National Bond
Supranational Bond
Government Agency
Municipal
Corporate Bond
Pfandbrief
Mortgage Backed Security (MBS)
Asset Backed Securities (ABS)
CMO Private
Collateralised Mortgage Obligation (CMO)
Collateralised Debt Obligation (CDO)
Collateralised Loan Obligation (CLO)
Un-stripped Government Agency
Stripped Government Agency
Municipal Bonds
Corporate Bond
Covered Bonds
Pfandbrief
Jumbo Pfandbrief
MBS Private
ABS Agency
ABS Private
CDO
CLO
Commercial Paper
Certificate of Deposit
(
Currently the following OECD countries debt instruments are eligible in CSD: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Ireland, Netherlands, Norway, Sweden and, UK.
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 10
3.4.1 Collateral Schedule / Rulesets
Collateral schedules are setup in AccessEdge as so-called “rule-sets”. Below is a process description
for the setup of rule-sets in the system which is performed by an operations group in BNY Mellon
SA/NV on behalf of BNY Mellon CSD.
1. Rule-sets are initially set up on AccessEdge based on a collateral schedule (Schedule III to
the Participant Adherence Agreement) signed by the collateral provider, collateral receiver,
and BNY Mellon CSD as the triparty collateral management agent.
2. Modifications to rule-sets can only take place following the same process as per the
establishment of the initial rule-set i.e., with the signatures of the three parties involved.
Unless contractually agreed, or a power of attorney has been provided to instruct both sides,
there are no exceptions or unilateral modification of the collateral schedules.
3. The rule-set becomes active upon linking to the relevant triparty collateral account.
The picture below highlights the operational flow for the collateral screening set up:
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 11
3.4.2 Collateral Eligibility Criteria
The picture below gives an overview on the different criteria that can be considered for setting up the
eligibility criteria in the so-called “rule-set”.
On AccessEdge, there can be criteria that apply:
to the type of security itself (country of origin, issuer, product currency, security type, et al)
to the underlying trade (trade type, trade currency)
to the calculated margin (where to apply and how to calculate)
to different concentration limits that can be configured
to a group of securities (we can group securities by setting up what we call a “tag”)
The list is not an exhaustive list as the system is very flexible in setting up different rule-sets and
eligibility criteria.
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 12
The collateral eligibility filters in AccessEdge allow the collateral receiver and the collateral provider to
manage their collateral selection on a fully automated basis. As explained above rule-sets are an
electronic representation of the information contained in the schedule of eligible securities from the
collateral agreements. A rule-set is attached to the collateral accounts to ensure that all the eligibility
criteria are met when securities are allocated to collateral accounts. The technology is designed to be
flexible to handle complex rules across all security types and be scalable to add new filtering
capabilities to keep pace with the evolution of business and risk management practices of triparty
collateral management collateral providers and receivers.
As shown in the above picture, a rule-set can be formed by the combination of criteria based on
different attributes of a security, for example concentration requirements and margin requirements etc.
Listed below are the individual entities from the rule-set manager, with a description of the
functionality each provides:
Security - Broad types of securities (e.g., corporate bonds, sovereign debt, equities, etc..) or
individual security types, can be included or excluded with this option. This is a high level identifier to
which many other qualifiers (entities), such as margins, concentrations, ratings, etc. can be attached.
Margin - Margin can be applied at any level of the schedule while offering the flexibility of increased
margins for particular securities. (e.g., margin of 103% for S&P 100 equities, but 104% for NIKKEI 225
equities). Margin can be calculated as either margin percentage (102%) or haircut percentage (98%).
Concentration – The concentration function can be applied to any applicable data entity. For
instance, concentrations may be applied to any of the following entities, or any combination of the
following entities:
• security type;
• issue;
• issuer;
• currency;
• country of origin;
• issue rating;
• issuer rating;
• equity index;
• convertible bonds underlying equity index;
• ADR’s underlying equity index;
• individual security; and
• nny other applicable entity.
The following types of concentrations are supported on the above list of entities:
Currency based: The concentration limit may be expressed as any amount of any currency. For
example, collateral may not exceed a maximum of 50 million EUR of any one issuer, or a maximum of
45 million USD of NIKKEI 225 equities.
Percentage of deal: The concentration limit may be expressed as a percentage of the amount to be
collateralised. For example, a maximum of 5 % of the collateral can be made up of any one issue.
Market Cap: The concentration limit may be expressed as a percentage of market capitalisation (for
equities). For example, equities may be eligible, however the maximum amount of any one issue may not
exceed 2% of the stock’s market cap.
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 13
Amount outstanding: The concentration limit may be expressed as a percentage of the amount outstanding
(for convertible bonds). For example, a convertible bond may be eligible, however the maximum amount of
any one issue may not exceed 5% of the amount outstanding.
Average traded volume – Equities: The concentration limit may be expressed in terms of a stock’s
average traded volume over any moving average period. For example, an equity may be eligible,
however the maximum number of shares cannot exceed 3 times the 90 day average traded volume of
the stock.
Average traded volume – Convertibles: The average traded volume of a convertible bond’s
underlying equity can also be used as a concentration limit for convertible bonds.
All of the above concentrations can be applied to a single position or to multiple positions.
Additionally, concentrations can be applied within a single deal or across multiple deals (with each
counter-party).
Issuer – The underlying issuer of any security type can be recognised, and all of the issuer’s debt and
equity can be included or excluded. Various margins and concentrations can also be applied at the
issuer level. (e.g., Maximum exposure to any one issuer is 50MM USD – for a corporate issuer,
RepoEdge would consider the debt, equity and money market issuance of that issuer).
Issuer Rating – Provides the ability to filter collateral based on the issuer rating of a debt, equity or
money market issue.
Security Rating – This feature allows the allocation server to allocate securities based on a securities
long term or short term credit rating. (e.g., securities must be rated >= A or $30mm maximum
collateral value for securities <= A-)
Security ID – Allows for the inclusion or exclusion of any individual security (or group of securities).
Various margins or concentrations can also be applied to the individual securities selected.
(e.g., CAC40 stocks margined at 3%, except for ISIN FR123456789 where margin to be applied =
4%).
Security Price - Allows securities to be included or excluded based on a maximum or minimum price
(e.g., Securities must have a price of at least $5.00 to be eligible.)
Tag – Facility to group securities, such as the constituents of worldwide equity indices, or any other
group of securities. Customised groups of securities can be created for inclusion or exclusion or for
margin or concentration purposes. (e.g., Exclude the following 25 securities from my account, or
include members of the S&P500 index..
Depository – Securities can be included or excluded based on the depository at which they are held.
Different concentrations or margins can also be applied. Country – Any single country of origin can be
used to include or exclude securities. Various margins and concentrations can be applied by country
of origin. (e.g., securities with a country of origin outside G7 countries to make up no more than 25%
of the collateral)
Months to Maturity – Can be used to apply a minimum or maximum number of months to maturity
restriction to any debt instrument. (e.g., maximum maturity of 10 years for each eligible security)
Weighted Average Maturity – Allows the allocation server to take a portfolio-based approach to
collateralising an account by calculating and adhering to a weighted average maturity requirement if
the collateral basket received is fixed income collateral only. (e.g. corporate bonds rated A or better
with a weighted average maturity of less than 10 years)
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 14
Position Currency – Allows for flexible margins and concentrations based on the currency of each
position. (e.g. 103% margin on USD denominated securities and 105% margin on JPY denominated
securities)
Deal (Trade) Currency – Allows for different rules to be applied on the eligible securities according to
the deal (trade) currency (e.g., equities quoted on AEX are eligible. If the deal (trade) is in EURO, the
margin will be 105%. If the deal (trade) is in USD, the margin will be 110%.)
Deal (Trade) Type – This feature allows specific restrictions such as margins or concentration
limits to be applied to different types of deals (trade), i.e., overnight, rollover or term deals (trades).
Anchor – Internal BNY tool used to group multiple security types that share the same characteristics
such as margin or concentration
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 15
4 Trade Life Cycle
The following sub-chapters will give an overview of the trade life cycle from trade entry, trade
collateralisation, trade modification, to trade termination. A high level overview is defined below:
4.1 Trade Initiation
Trades in the triparty collateral management system are set-up in a fully automated way.
Collateral Provider and Receiver send their confirmation instruction to BNY Mellon CSD for matching
purposes.
The confirmation instruction can only be received through SWIFT message (MT527), sent to BNY
Mellon CSD’s BIC address GCSDBEBB, or direct input in AccessEdge through the Automated Deal
Matching (ADM) module. Automated Deal Matching is the process of automating the matching
process of an instruction sent by you (the collateral provider, or the dealer) with the instruction of a
counterparty (in this case a collateral receiver or investor) to create a trade. An instruction is a
message or form you can send to the system at BNY Mellon that contains various trade information
such as the trade amount, trade currency, interest rate, product (such as a borrow pledge or repo
trade) and a trade's start and end date.
A trade can only be created in AccessEdge when matching confirmation instructions are received
from a collateral provider and a collateral receiver unless contractually agreed otherwise.
AccessEdge will not process unmatched transactions. Unmatched items are escalated to the
collateral provider and collateral receiver to advance resolution.
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 16
Deal Instruction Monitor Overview
Automated matching status updates will be provided to collateral provider and collateral receiver
either via SWIFT message (MT558) or via the AccessEdge online GUI in the Deal Instruction Monitor
Window.
Following the creation of the trade, the allocation process will be started.
The picture below summarises the process flow:
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 17
4.2 Trade Types
To begin with, BNY Mellon CSD will only support free of payment collateral movements regardless of
the underlying obligation which needs to be collateralised.
4.3 Trade changes / modifications
Each instruction captured on Automated Deal Matching goes through a matching process. Once the
matching process is completed and the requirements are met, the trade is created.
Once a trade is added to the system, the following actions can be performed upon receipt of matching
instructions from both collateral provider and collateral receiver unless contractually agreed otherwise:
Modify - A modify action modifies an existing instruction that has not yet matured.
Cancel - A cancel action sent on the same day than the original instruction cancels an existing
instruction.
Force Mature - A force mature action modifies a term instruction to set its end date to the current
date.
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Tri-Party Collateral Management Service Description // 18
4.4 Allocation Process
To fulfill BNY Mellon CSD's contractual duties as triparty collateral management agent, the triparty
collateral management services system has been set up to accept / allocate only those securities
deemed eligible in the collateral schedule for each specific triparty collateral management
arrangement. The system has the ability to validate that collateral provided for a trade is appropriate
based on the collateral schedule established by the collateral provider and collateral receiver.
Sufficiency and eligibility of collateral is checked electronically versus the approved collateral schedule
on the system. The system prevents allocation of collateral that is not eligible according to the agreed
collateral schedule. A collateral schedule must be modified by matching instructions from both parties
before alternative collateral can become eligible.
The following picture highlights the automated process that AccessEdge performs to auto- allocate
collateral to the different trades. The process is called “ Dynamic Continuous Optimisation-“DCO” and
will be performed several times per day. It is triggered by the Global Collateral Management (GCM)
Client Service Representative for the account of the collateral provider.
As the picture highlights, during the allocation process, the system might identify collateral shortages.
If the collateral provider enters into a new trade with a collateral receiver but has not yet provided
additional eligible securities into the collateral provider account, this could cause a shortage for the
new trade. For existing trades in the system, the allocation process is done on a give-before-you-get
principle (see below for details), to prevent collateral shortages from occurring.
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Tri-Party Collateral Management Service Description // 19
4.5 Valuation of Securities
The collateral in the triparty collateral management system is marked to market once per day with
end-of-day prices from the previous day. This means that at the opening of each business day during
which a trade is outstanding, BNY Mellon CSD determines the margin value of all eligible collateral in
the collateral receiver’s securities account and triggers margin call/margin excess as will be explained
in the following paragraphs.
Margin Deficit
If the aggregate value of the termination values of any outstanding trade on any business day is
greater than the aggregate margin value of eligible collateral in the collateral receiver’s securities
account with respect to such trade, BNY Mellon CSD promptly notifies the collateral provider. On the
date of such notice, the collateral provider transfers to the collateral provider's securities account (for
onward transfer by BNY Mellon CSD to the collateral receiver’s securities account) sufficient
additional eligible collateral ("additional eligible collateral") so that, after transfer of such additional
eligible collateral to the collateral receiver's securities account, the aggregate margin value of eligible
collateral (including such additional eligible collateral) equals or exceeds the aggregate value of the
termination values of all outstanding trades. If the collateral provider fails to transfer an appropriate
amount of additional eligible collateral on the date of any such notice, BNY Mellon CSD notifies the
collateral receiver and the collateral provider and awaits further instructions. All additional eligible
collateral transferred by the collateral provider to the collateral receiver's securities account is deemed
to be eligible collateral for the purposes of the triparty collateral management terms.
Margin Excess
If the aggregate margin value of the eligible collateral held in the collateral receiver’s securities
account on any business day exceeds the aggregate value of the termination values of all outstanding
trades (the amount of such excess being the "margin excess"), BNY Mellon CSD transfers securities
from the collateral receiver's securities account to the collateral provider's securities account having
an aggregate margin value equal to the margin excess. By entering into the Participant Adherence
Agreement and Schedule III thereto: (x) the collateral receiver authorises BNY Mellon CSD to transfer
eligible collateral from the collateral receiver's securities account pursuant to clause 3.5.2 (ii) of the
Triparty Collateral Management Terms; (y) the collateral provider authorises BNY Mellon CSD to act
on its behalf; and (z) the collateral receiver acknowledges that BNY Mellon CSD shall act on behalf of
the collateral provider in selecting the eligible collateral to be so transferred.
4.6 Substitution & Give-before-you get
For existing trades in the system, the allocation process is done on a give-before-you-get principle to
prevent collateral shortages from occurring. To substitute collateral for an existing trade, the system
foresees that the collateral provider makes additional eligible securities (at least to the amount of
collateral he wants to substitute) available, so that it can be allocated to the collateral receiver prior to
the return of the previously allocated securities. For the recall of securities, the participant must
instruct BNY Mellon CSD with matching instructions from: i) the participant’s collateral management
custody account and ii) the participant settlement custody account. This instruction will undergo
multiple checks and might be blocked temporarily as triparty collateral management for BNY Mellon
CSD participants is operated under a “give-before-you-get principle” without any credit lines being in
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 20
place to handle substitution processes. BNY Mellon CSD systemically imposes credit line controls by
holding onto the recall instruction in BNY Mellon CSD’s instruction capture system. These recall
instructions will be routed to the triparty collateral management system and into a dedicated credit line
monitoring system. The credit line monitoring system will review if the recall instruction can pass or
not. If the security is unallocated, the pending instruction can be released for further processing, and
the credit line monitoring system sends an approval message back to the instruction capture system
to release the instruction.
For a recall related to allocated collateral, the collateral management Client Service Representative
will go into a so-called projection environment where the pending recall(s) is (are) excluded from the
eligible collateral.
This exclusion should be automated in future phases of the credit line monitoring system, but for now
this would be done manually.
The account administrator would then initiate an automated allocation run without the excluded
collateral and try to cover the collateral obligation taking into account the eligibility criteria of the
respective collateral receiver while using all the collateral provided.
Upon completion of the automated run, and if the available collateral is sufficient to cover for the
substituted collateral, the account administrator initiates an automated “copy back to live”. The system
starts creating net movements to replicate what was done in the projection environment to the live
environment while adhering to the give before you get principle. An enforced credit control process is
activated that will ensure that the potential alternative collateral is posted in the account first, and only
after that step, the recalled security is removed to reflect the results as they were produced in
projection. The collateral that was excluded in projection mode will only be unallocated (moved to the
provider's triparty collateral account) if it does not create an exposure towards the collateral receiver.
The recalled security now appears as unallocated and the respective pending recall instruction can be
released for further processing. The credit line monitoring system picks this up and sends an approval
message to the instruction management system to release the instruction.
4.7. Corporate Actions
BNY Mellon CSD as triparty agent is responsible for all aspects of asset servicing insulating both
parties from any corporate action responsibilities.
BNY Mellon CSD as triparty agent filters collateral so that income paying securities will reside in the
collateral provider’s account over record date.
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Tri-Party Collateral Management Service Description // 21
If BNY Mellon CSD is unable to substitute prior to record date, and is made aware of impending
income on any eligible collateral held by it pursuant to the Triparty Collateral Management Terms,
BNY Mellon CSD promptly notifies the collateral provider and the collateral receiver via phone and/or
e-mail and the collateral receiver agrees that BNY Mellon CSD acts upon the instruction of the
collateral provider taking into account the tax status of the collateral receiver
Cash proceeds such as corporate event's revenue, income and distribution do not constitute
collateral. If substitution is successful, such cash proceeds are credited to the provider's cash account
opened on BNY Mellon SA/NV.
4.8 Trade Closing & Redelivery of Collateral
The triparty collateral management system differentiates between term trades, that have a predefined
termination date or open trades which remain open until further matching instructions from collateral
provider and collateral receiver are received by BNY Mellon CSD. These instructions can be
submitted either via SWIFT (MT527) or via the automated deal matching module.
The termination date of trade may not be altered or modified subsequent to the trade date unless
BNY Mellon CSD receives matching instructions to that effect from the collateral receiver and the
collateral provider.
Upon termination of the trade, BNY Mellon CSD unwinds the trade and redelivers securities
equivalent to the collateral from the collateral receiver’s account to the collateral provider’s account.
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Tri-Party Collateral Management Service Description // 22
5 Master Data and Price Feeds
The triparty collateral management system AccessEdge (RepoEdge) receives a number of external
data feeds from different data vendors, both internal and external data vendors.
The below picture provides an overview on the different data vendor feeds that are used.
The processing of securities master data and price data is embedded into a highly automated
processing framework with
predefined business and processing rules determining the use of data;
control objectives to ensure data quality; and
automated reporting to facilitate data monitoring.
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 23
Notes:
¹ BNY Mellon Securities Data Management (SDM) is the primary price and data provider. Securities Master Database (SMDB) is the system.
² Use of Gifford Fong Associates as a price vendor is limited, and allocation of such securities is controlled using the Rule-Set Manager system.
³ BNY Mellon’s Portfolio Services System
4
Price types other than “Bid” may be used dependent on local market practice and/or price availabilit.y.
In the paragraphs below, special focus will be given on the price feed from BNY Mellon’s internal
Securities Master Database System (SMDB).
5.1 Price Selection Process
BNY Mellon CSD as triparty collateral management agent does not have any discretion on the prices
applied for collateral valuation.
For triparty collateral management services, prices are received by the data warehouse (SMDB) from
various independent vendors and aggregated and cleansed into the triparty collateral management
services system where the securities are valued.
A number of tests are run to validate the quality of the pricing data. To start, all prices received are
arranged in order of relevance (1. bid, 2. last, 3. mid, 4. low, 5. valuation). The first test is a standard
deviation test which removes any vendor outside a specific range (+/- 10% away from the average
vendor price) for the asset type and places the remaining vendors in vendor order. The individual
price is compared against the average of the remaining prices (after the standard deviation test), and
prices outside the tolerance level (+/- 2%) are removed. Prices are also compared against the
previous day's selected price; again prices outside the tolerance level is removed.
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 24
SMDB will also identify the last date that the price that was updated. If the price is more than three
days old, the price will not be fed to the triparty collateral management system, and the security will be
excluded from allocation.
BNY Mellon is using multiple vendors for valuation of collateral:
Bloomberg
Bloomberg Fair Value
Bloomberg Generic
Euroclear
Extel Jobber
Extel Official
Extel Supplemental
IDC
Reuters
S&P
Telekurs
The vendor order is determined for each asset class. A new price source will be added for triparty
collateral management services for the Eurocredit System however, specific processing requirements
will apply.
Each price is subject to a number of tests:
mean side deviation
price type order
vendor order
vendor majority
previous price deviation
last updated price criteria
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Tri-Party Collateral Management Service Description // 25
5.2 Price Challenge Process
A dedicated price challenge process is supported if collateral provider or collateral receiver is in
disagreement with the price.
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Tri-Party Collateral Management Service Description // 26
6 Event of Default
Part of the duties related to the triparty collateral management services offering by BNY Mellon CSD
are performed by BNY Mellon SA/NV, pursuant to an inter-company outsourcing agreement.
The overall default procedure of BNY Mellon CSD as a triparty collateral management agent is
embedded into a companywide BNY Mellon default procedure. BNY Mellon as a group follows the socalled “Distressed Broker Dealer Management Plan” to describe the actions and decision making
responsibilities to be taken by BNY Mellon personnel in response to a distressed or defaulter broker
dealer client. In the context of BNY Mellon CSD, the applicable default procedure is not limited to
“broker dealer clients” but is applicable for any collateral provider or collateral receiver. BNY Mellon
SA/NV will execute the default management procedures to the extent participants of BNY Mellon CSD
as collateral providers or receivers in triparty collateral management are affected.
Where an event of default occurs in relation to a deal, the non-defaulting party promptly notifies BNY
Mellon CSD in writing of the occurrence of such event of default. BNY Mellon CSD may rely upon
such notice without further enquiry. BNY Mellon CSD promptly notifies the defaulting party of its
receipt of notification of an event of default from the non-defaulting party. BNY Mellon CSD's
obligations in respect of the triparty collateral management terms cease upon receipt of such notice
from the non-defaulting party but BNY Mellon CSD continues to hold all securities in the collateral
receiver's securities sccount for the account of the collateral receiver and in the collateral provider’s
securities sccount for the account of the collateral provider, subject to the Triparty Collateral
Management Terms, pending instructions from the non-defaulting party with respect to the exercise of
its rights. BNY Mellon CSD has no obligation to act pursuant to such instructions if it believes in good
faith that such action violates any applicable judicial order, statute, rule, law or act of any
administrative authority or regulatory authority.
The paragraph below summarises the key steps that are taken in case a collateral receiver declares
the default of the collateral provider in the context of the overall default management procedure.
Triparty collateral receivers have to send written notices of default against the defaulting collateral
provider. The default notice must be sent to BNY Mellon CSD who will send the notice to legal
counsel to validate that the request is consistent with the legal contracts. Legal counsel will confirm
the occurrence of a default event and will approve if BNY Mellon CSD can act upon instructions of the
non-defaulting party. As soon as legal counsel has confirmed the default notice, BNY Mellon CSD will
cease to act upon any new instructions from the defaulting collateral provider including but not limited
to preventing any substitutions of collateral by the collateral provider. BNY Mellon CSD will inform the
defaulting collateral provider promptly of its receipt of a default notice.
As a next step, BNY Mellon CSD will reconcile the collateral management custody account of the
collateral provider against the sum of the triparty collateral management account of the collateral
provider and the triparty collateral management accounts of any collateral receiver linked to the
collateral provider in default.
Following this ad-hoc reconciliation, BNY Mellon CSD will send to the collateral receiver as soon as
possible an accurate statement that will list the collateral held for the collateral receiver for each
account, and the statement will include: account number, asset description, security identification
code and asset quantity.
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 27
After the provision of the reconciliation records and the account statement, BNY Mellon CSD will
instruct the security movement from the custody account of the defaulting collateral provider to the
custody account of the collateral receiver to reflect the collateral position in the custody system of
BNY Mellon CSD.
Once BNY Mellon CSD has instructed the security movement to the collateral receiver’s custody
account, the assets are at their disposal. They will send specific delivery instructions to BNY Mellon
CSD. Such instructions from the non-defaulting party should be sent to BNY Mellon CSD in the
standard settlement instructions formats, i.e., via SWIFT or Workbench.
Following an event of default, the collateral receiver is the legal owner of the securities held in their
collateral receiver account. Therefore, the receiver would have all rights to the securities and
entitlements to these securities including any related cash proceeds. Any cash proceeds of a custody
event would thus be paid to the receiver's cash account. Based on the collateral agreement with BNY
Mellon CSD, the receiver would have the right to immediately dispose of any cash credited to their
cash account.
In case substitution prior to the corporate event did not occur and the collateral provider defaults, then
the collateral receiver as the non-defaulting party shall promptly notify BNY Mellon CSD in writing of
the occurrence of such event of default. BNY Mellon CSD will continue to hold any cash proceeds so
received in the collateral receiver's account pending BNY Mellon CSD’s receipt of written instructions
from the collateral receiver as the non-defaulting party with respect to the exercise of its right under
the underlying agreement.
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 28
7 Connectivity and Reporting
BNY Mellon CSD will provide access to triparty collateral management services via different
communication channels:
Browser based
o
Internet Client File Transfer (ICFT)
o
AccessEdge
FTP file transfer
o
PGP encryption
Host to Host messaging
The triparty collateral management system provides broad reporting to collateral providers and
collateral receivers. Some of the reports/files available include:
Allocation extract
o
Full detail of collateral information at a security level
o
CSV file
o
ICFT, FTP and AccessEdge
Dealer extract
o
Full detail of deal information
o
CSV file
o
ICFT and FTP
Price extract
o
Full detail of collateral information at a security level and deal information
o
Flat file
o
ICFT and FTP
Price report
o
Full detail of collateral information at a security level and deal information
o
Pdf file formats
MT535 format
BNY Mellon CSD
Tri-Party Collateral Management Service Description // 29
8 Reconciliation
For triparty collateral management services accounts held at BNY Mellon CSD, a daily reconciliation
of collateral positions will be set-up to reconcile the collateral provider’s collateral account held in BNY
Mellon CSD’ settlement system against the aggregate collateral position held in the triparty collateral
management system, AccessEdge. The collateral provider’s collateral account held in BNY Mellon
CSD’s settlement system will be reconciled daily against the aggregate collateral position in the
collateral provider’s triparty collateral services account (for any un-allocated securities) and the
respective collateral receivers’ triparty collateral services accounts (for any securities that have been
allocated).
A dual reconciliation is ensured as BNY Mellon CSD itself will reconcile its accounts in the settlement
system against the positions held in the market via sub-custodian or (I)CSDs.
BNY Mellon CSD
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