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Dealers Seek ESMA Approval of Third Way Over Asset Segregation

Risk Magazine is reporting that the Futures and Option Association, together with a select set of dealers, has approached ESMA for its approval to the “LSOC with excess” model of segregation as an alternative, rather than in addition, to the individual client segregation model mandated under EMIR.

Article 39 of EMIR requires CCPs to offer two types of segregation model:

  • Individual client segregation; and
  • Omnibus client segregation.

However, EMIR does not restrict the ability of firms to offer further segregation options and a number of such models are now beginning to emerge.  Broadly, these can be described as:

  • Omnibus Net
    • positions and collateral are commingled by the clearing member
    • margins are calculated and transferred on a net basis
    • mutual client risk exists
  • Omnibus Gross
    • positions and collateral are commingled by the clearing member
    • margins are calculated and transferred on a gross basis
    • mutual client risk exists
    • no segregation of excess margin occurs
  • Omnibus Gross (with excess) i.e. “LSOC with excess”
    • same as ‘Omnibus Gross’ except that excess margin is lodged with the CCP
  • Individual segregated account
    • assets are segregated from both the clearing member and other clients of the clearing member
  • Full asset segregation
    • the client deals directly with the CCP, rather than through the clearing member.

The FOA delegation believes that the LSOC with excess model is more economically viable and yet offers comparable levels of protection to an individually segregated account.  The article suggests that ESMA is listening.  However, the potential stumbling block may lie in the fact that, in contrast to common perceptions about the way individual segregation accounts will operate, LSOC with excess is undoubtedly a value-based model under which a client is not guaranteed to receive back exactly the same assets as it posted originally.

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