US 20140188691A1

(19) United States

(12) Patent Application Publication (10) Pub. No.: US 2014/0188691 A1
BLANK et al.
(54)

(43) Pub. Date:

AUTOMATIC COLLATERAL EXCHANGE

Jul. 3, 2014

Publication Classi?cation

FOR REHYPOTHECATED COLLATERAL

(5 1) Int. Cl.
G06Q 40/04
(52) US. Cl.

(71) Applicant: THE BANK OF NEW YORK

MELLON, New York, NY (US)

(2012-01)

CPC .................................... .. G06Q 40/04 (2013.01)

(72)

Inventors: Brian BLANK, Manalapan, N] (U S);

USPC .......................................................... .. 705/37

Tejas JHAVERI, Piscataway, N] (U S);

(57)

Mahendran GUNASEELAN, Chennai

(IN); Kim LEE, Queens Village, NY

in ?nancial transactions includes processors coupled to

memory con?gured to store deal attributes. The processors
may execute a collateral allocation module that is operable to
receive a request to release a collateral allocation, identify the
collateral allocation in one or more deals at a ?rst level, and

(21) App1.No.: 14/146,390

Filed:

A system for managmg rehypothecated collateral allocatlons

(Us)

(22)

ABSTRACT
.

(IN); Mariappan GOPAL, Chennai

identify a rehypothecated portion of the collateral allocation

in deals at subsequent levels. Where an entirety of the collat
eral allocation is identi?ed at each subsequent level, the col

Jam 2, 2014

lateral allocation module may credit the one or more deals at

each subsequent level With net free equity equal to an amount

-

(60)

of cash to be exchanged at a prior level of the subsequent

Related U's' Apphcatlon Data

Provisional application No. 61/748,633, ?led on Jan.
3, 2013.

levels. When a total of the net free equity credit is equal to an

amount of cash to be exchanged at the ?rst level, the collateral
allocation module may release the collateral allocation.

lOO

SELLER

BUYER

*
;
:

t
PLATFORM
MANAOER

130

120
140

NETWORK
COMM. MODULE

ACCOUNT
SEARCH MODULE

MEMORY/STORAGE
DEVICES]

@
COLLATERAL

REPORTING AND

ALLOCATION MODULE

MESSAOINO MODULE

I' ______________ _ 7

DATABASE

160

L --------------- -1

g """ "PAYMENT :

OPERATOR I/O &

: PROCESSING MODULE :

DISPLAY

L _______ _1L_5_ ______ __ '

165

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Jul. 3, 2014

US 2014/0188691A1

AUTOMATIC COLLATERAL EXCHANGE

FOR REHYPOTHECATED COLLATERAL

[0001] This application claims the bene?t of priority to

Us. Provisional Application Ser. No. 61/748,633, ?led Jan.
3, 2013, the entire contents of which are hereby incorporated

by reference.
BACKGROUND

[0002] This application is directed to computer-imple

mented systems and methods useful for managing collateral
allocations in ?nancial transactions. While aspects of this
application may be associated with other types of collateral

allocations, the computerized systems and methods for allo

cating collateral described herein may be in reference to

Repurchase Agreements (Repos), where the collateral is

managed by a third party agent (a Tri-Party agent) in Tri

Party Repos.
[0003] In a Repo, a seller (dealer/borrower/cash receiver)
sells securities for cash to a buyer (lender/ cash provider) and
agrees to repurchase those securities at a later date for more

cash. The Repo rate is the difference between borrowed and

paid back cash expressed as a percentage. The buyer typically

[0007] In some Repo agreements, the seller/ dealer may

have numerous assets that are being managed by the Tri-Party
agent. In these cases, it may be desirable for the Tri-Party
agent to allow for the restructuring of the collateral of the
deals, so that the seller may free up some assets while placing

other agreeable assets in the legal ownership of the buyer,

during the deal. Such movements would generally be agreed
to by the buyer and the seller when entering the agreement to

be managed by the Tri-Party agent.

[0008] In some deals, the Tri -Party agent may be authorized
to utilize the collateral that has been deposited therewith for
their own purposes. Such utilization of the collateral is known

as rehypothecation, and may be for any appropriate purpose,

including but not limited to backing the transactions and

trades made by the Tri-Party agent. In exchange for permit

ting rehypothecation, the party who deposits the securities as
collateral (e.g., the seller/dealer) may be compensated, such
as by receiving a lower cost of borrowing for various deals, or

by receiving a fee discount from the Tri-Party agent.

[0009] Among other things, what is needed is a system and
method for managing collateral in ?nancial transactions, sim
plifying and improving the allocations of collateral (e. g.,
those associated with Tri-Party Repos in a dealers portfolio)
while accounting for collateral that has been rehypothecated.

utilizes Repos to invest cash for an agreed upon duration of

time (typically overnight, although the term may vary), and

would receive a rate of interest in return for the investment.

The seller typically utilizes Repos to ?nance long positions in

securities or other assets in the sellers portfolio.
[0004] Repos are ?nancial instruments used in money mar
kets and capital markets, and are economically similar to a

secured loan, with the buyer receiving securities as collateral

to protect against default. Virtually any security may be
employed in a Repo, including, for example, Treasury or
Government bills, corporate and Treasury/Government
bonds, stocks/shares, or other securities or ?nancial instru
ments. In a Repo, however, the legal title to the securities
clearly passes from the seller to the buyer, or investor.
Coupons (installment payments that are payable to the owner
of the securities), which are paid while the Repo buyer owns

the securities are, in fact, usually passed directly onto the

Repo seller. This may seem counterintuitive, as the ownership

of the collateral technically rests with the buyer during the

Repo agreement. It is possible to instead pass on the coupon

by altering the cash paid at the end of the agreement, though

this is more typical of Sell/Buy Backs.
[0005] Although the underlying nature of a Repo transac
tion is that of a loan, the terminology differs from that used
when talking of loans because the seller does actually repur
chase the legal ownership of the securities from the buyer at
the end of the agreement. Although the actual effect of the
whole transaction is identical to a cash loan, in using the

repurchase terminology, the emphasis is placed upon the

current legal ownership of the collateral securities by the

respective parties.

SUMMARY

[0010]

Through various embodiments described herein, the

system and method of this disclosure enhances the allocations

of collateral associated with ?nancial deals. For example,

various embodiments provide functions relating to automated
exchange of collateral within the deals while satisfying the
requirements of the deal, and the preferences of those partici
pating in the deal. Further, various embodiments may track

positions (e. g., collateral allocations) that have been rehy

pothecated into other deals, to facilitate releasing such posi
tions.
[0011]

Various embodiments of this disclosure may be used

in conjunction with existing ?nancial services platforms, for

example the Bank of New York Mellon s Tri -Party repurchase
agreement products (RepoEdge) which allow clients to out
source the operational aspects of their collateralized transac

tions, and Derivatives Margin Management (DM Edge),

which helps clients manage credit risks associated with
derivatives transactions by enabling them to accept, monitor
and re-transfer collateral. These services, among others such

as Repo Margin Management (RM Edge), MarginDirecth,

and Derivatives Collateral Net (DCN), may be delivered to

clients throughAccessEdgeSM, a real-time, web-based portal.

[0012] The operator/manager of the system and method of
this disclosure acts as a third-party service provider to the two

principals to a trade, and the various functions performed by

the system and method provide value-added services which
mitigate risk and lead to greater ef?ciencies for both parties.
[0013]

According to an embodiment, a system for manag

ing rehypothecated collateral allocations in one or more

[0006] In a Tri-Party Repo, the collateral is managed by a

Tri -Party agent (typically a bank), who may match the details
of the trade agreed upon by the buyer and the seller, and
assume all of the post trade processing and settlement work.
The Tri-Party agent controls the movement of securities, such
that the buyers do not actually take delivery of collateralized

to receive a request to release a collateral allocation, identify

securities. The Tri-Party agent acts as a custodian for the

the collateral allocation in one or more deals at a ?rst level,

?nancial transactions includes one or more processors

coupled to one or more memory elements con?gured to store

deal attributes. The one or more processors are operable to

execute at least one collateral allocation module. The at least

one collateral allocation module when executed, is operable

collateral, and allows the ?ow of collateral and cash between

and identify a rehypothecated portion of the collateral allo

buyers and sellers across one or more deals.

cation in one or more deals at one or more subsequent levels.

Jul. 3, 2014

US 2014/0188691Al

Where an entirety of the collateral allocation is identi?ed at

[0028]

each subsequent level, the collateral allocation module is

con?gured to display release requests for selection of repro

operable to credit the one or more deals at each subsequent

cessing thereof.

FIG. 13 illustrates an embodiment of a user interface

level with net free equity (NFE) equal to an amount of cash to

be exchanged at a prior level of the one or more subsequent
levels. When a total of the net free equity credit is equal to an

amount of cash to be exchanged at the ?rst level, the collateral

allocation module is operable to release the collateral alloca
tion.

[0014]

According to another embodiment, a computer

implemented method for managing rehypothecated collateral

allocations in one or more ?nancial transactions includes
receiving, at one or more processors coupled to one or more

memory elements con?gured to store deal attributes, a

request to release a collateral allocation. The method also
includes identifying, at the one or more processors, the col
lateral allocation in one or more deals at a ?rst level. The
method also includes identifying, at the one or more proces

sors, a rehypothecated portion of the collateral allocation in

one or more deals at one or more subsequent levels. Where an

entirety of the collateral allocation is identi?ed at each sub

sequent level, the method additionally includes crediting, via

the one or more processors, the one or more deals at each

subsequent level with net free equity (NFE) equal to an

amount of cash to be exchanged at a prior level of the one or
more subsequent levels. When a total of the net free equity
credit is equal to an amount of cash to be exchanged at the ?rst

level, the method further includes releasing, via the one or

more processors, the collateral allocation.

[0015]

The system and method of this disclosure provides

various capabilities as discussed more fully in the detailed

description below.

DETAILED DESCRIPTION

[0029]

In the discussion of various embodiments and

aspects of the system and method of this disclosure, examples

of a processor may include any one or more of, for instance,

a personal computer, portable computer, personal digital

assistant (PDA), workstation, or other processor-driven
device, and examples of network may include, for example, a
private network, the Internet, or other known network types,
including both wired and wireless networks.
[0030] Those with skill in the art will appreciate that the
inventive concept described herein may work with various

system con?gurations. In addition, various embodiments of

this disclosure may be made in hardware, ?rmware, software,
or any suitable combination thereof. Aspects of this disclo
sure may also be implemented as instructions stored on a

machine-readable medium, which may be read and executed

by one or more processors. A machine-readable medium may

include any mechanism for storing or transmitting informa

tion in a form readable by a machine (e.g., a computing
device, or a signal transmission medium), and may include a
machine-readable transmission medium or a machine-read

able storage medium. For example, a machine-readable stor

age medium may include read only memory, random access

memory, magnetic disk storage media, optical storage media,

?ash memory devices, and others. Further, ?rmware, soft
ware, routines, or instructions may be described herein in

terms of speci?c exemplary embodiments that may perform

certain actions. However, it will be apparent that such
descriptions are merely for convenience and that such actions

BRIEF DISCUSSION OF THE DRAWINGS

in fact result from computing devices, processors, controllers,

[0016] FIG. 1 provides a functional block diagram of an

embodiment of a computer-implemented and networked sys
tem for collateral management;
[0017] FIG. 2 schematically illustrates an embodiment of a
release process associated with collateral allocations;
[0018] FIG. 3 schematically illustrates an embodiment of a

or other devices executing the ?rmware, software, routines, or

instructions.
[0031] Described herein is an exemplary algorithm which
may be implemented through computer software running in a
processor to determine optimal collateral allocations based

release process associated with releasing rehypothecated

FED collateral;
[0019]

FIG. 4 schematically illustrates an embodiment of a

Net Free Equity credit process for rehypothecated collateral;

[0020]

FIG. 5 illustrates an embodiment of a user interface

con?gured for deleting dealer positions;

[0021]

FIG. 6 schematically illustrates an embodiment of a

release process associated with releasing rehypothecated

DTC collateral;
[0022]

FIG. 7 schematically illustrates an embodiment of a

release process associated with internal position movements;

[0023]

FIG. 8 schematically illustrates an embodiment of a

cancellation request process;

[0024]

FIG. 9 illustrates an embodiment of a user interface

con?gured to identify various release requests;

[0025]

FIG. 10 illustrates an embodiment of a user interface

con?gured to display various release requests;

[0026]

FIG. 11 illustrates an embodiment of a user interface

on user-selected criteria. This algorithm is not intended to be

limiting, but is merely provided to describe one way of

accomplishing the functions associated with determining

optimal collateral allocations.
[0032]

In the discussion of various embodiments and

aspects of the system and method of this disclosure, examples

of trading parties include, but are not limited to, broker
dealers, institutional investors, and hedge fund managers.
[0033] In various embodiments, a web-based collateral
management system or platform links dealers with investors
to conduct collateral transactions in a safe, ef?cient, and
reliable way. Online dealers and investors can manage collat

eral among a diverse range of instruments, including Tri

Party repo agreements in all major currencies, securities lend

ing transactions, municipal deposits, bank loans, derivatives

transactions, letters of credit, and structured trades, for

example. The system may be managed by the Tri-Party agent,

and may additionally provide, for example, daily mark-to
market valuations, haircuts/margins, and concentration limits
(i.e., maintain percentages of market capitalization, dollar

con?gured to display a summary of legs associated with

amount limits for a particular security, or a percentage of the

rehypothecated transactions.

portfolio in a particular security, for example), as well as

manage, track, and settle collateral transactions across global

[0027]

FIG. 12 illustrates an embodiment of a user interface

con?gured to display details of a leg associated with a rehy

capital markets by working collaboratively with clients to

pothecated transaction; and

provide collateral transparency. The enhanced collateral allo