Canadian firms trading over-the-counter with U.S. brokers through CDS Clearing & Depository Services Inc. are going to be facing higher collateral requirements come this fall, which may threaten the viability of the cross-border service.

CDS Clearing reports that, effective November 1, participants in the New York Link service will be required to meet expanded collateral requirements due to the introduction of risk based margin by the National Securities Clearing Corp. in the United States

The New York Link enables CDS participants to clear and settle OTC trades with U.S. broker-dealers via the NSCC, gives firms access to custodial and settlement services offered by the Depository Trust Company, and reduces the need for CDS customers to maintain a U.S. presence.

However, CDS reports that when the new RBM requirements take effect, the NSCC will be holding all the RBM collateral from CDS’ sponsored participants, and CDS “will no longer have access to the collateral needed to protect the remaining New York Link participants from the default of a single sponsored participant”.

As a result, CDS says that it will require New York Link participants to post additional collateral daily, “which may double their daily collateral requirements and may also require New York Link participants to pre-fund their NSCC payment obligations from time to time.”

It also suggests that New York Link participants “may want to consider the impact of providing expanded collateral, whether through CDS Clearing’s New York Link service or by becoming direct members of NSCC and DTC.”

Firms are asked to tell CDS by September 30 whether they will continue to use the CDS service, or will pursue direct DTCC membership. “Based on the number of participants who would be interested in continuing under the new requirements, CDS Clearing will evaluate the economic and risk containment impacts on operating these services,” it says.

“If retaining the New York Link and DTC Direct Link services proves to be no longer viable, CDS will commit to supporting remaining participants until the end of April 2010, to allow time for their transition out of the service,” it adds.

IE