Overview of Seg Optimization Process

The following document outlines the inputs, outputs, and operational flow of the Softek segregation optimization process, along with a detailed description of the collateral selection methodology and a worked example.

Inputs:

Settlement Date Positions Data (including cash balances & existing segged ositions) 

Pending-settlement transactions

Segregated Positions Data (indicating segregated positions as understood by the back-office system) 

Basic Security Identifying Data 

Price Data (including FX Rates) 

All transactions resulting in the pending-settlement sale of a long-held position 

Collateral Pricing Data

Outputs:

Settlement Date Positions Data (including cash balances) 

Segregated Positions Data (indicating segregated positions as understood by the back-office system) 

Basic Security Identifying Data 

Price Data (including FX Rates) 

All transactions resulting in the pending-settlement sale of a long-held position 

Collateral Pricing Data

Process:

The Process must take place post market-close, but before the back-office interchange with the depository. 

All above referenced data must be transmitted to Softek before the initiation of this process; but not necessarily all simultaneously.

Softek Rules Execution:

Perform a basic margin calculation inclusive of all legal hedges, etc., on behalf of the client. 

The result of this calculation — both at the per-position level and in aggregate — informs the bulk segregation requirement as well as the collateral selection process. N.B. Since higher margin requirements for the client result in lower requirements for the BD to segregate on behalf of the client, ‘over-conservative’ short cuts like excluding certain potential hedges are not a valid approach to this calculation.

Second, identify candidate positions for segregation

Securities such as cash and derivatives are not candidates for segregation

Securities not in the possession of the BD (held away) are not candidates for segregation

Securities which are held long with an unsettled sale transaction are not candidates for segregation in the amount of the quantity which is pending-sale

Select securities for segregation equal to the bulk segregation requirement as described in Regulatory Rules

Lendable securities contribute to the bulk-segregation requirement on a loan-value-equivalence basis

Non-lendable securities contribute to the bulk-segregation requirement on a market-value-equivalence basis

Securities are selected for segregation on an inverse basis of the calculated value of releasing the collateral for use by the BD

Segregation overrides are considered here to either alter the priority of segregation, or compel the segregation of assets not otherwise required to be segregated by the regulatory calculation

Data Return – The reports/data described above are generated and returned to the client. – This step must occur with time to complete any downstream processing before the back-office interchange with the depository. 

Secondary Process:

To occur after the back-office interchange with the depository. 

Data Load – This process requires segregated positions as actually executed at the depository by the back-office system. – This process requires positions and prices as understood by the primary process. 

Data Return – This process compares the actual segregation performed by the back-office system to the intended segregation as calculated by Softek in the primary process.

Optimization Process Notes 

Below is a more detailed description of the process for selecting collateral for segregation or to make available for use by the BD. 

KEY METRICS 

CVSD: Collateral value per dollar of bulk seg requirement — the default behaviour of the algorithm is to select first the collateral with the highest CVSD. 

CV Adj: Collateral Value Adjustments — adjustments to the value of a piece of collateral in the rehypothecation market to reflect other value provided to the BD (for example, the commercial benefits of internalization). 

Hard Overrides: In addition to the default selection methodologies, collateral may always be forced into either a release or segregated position as a consequence of a hard manual override applied at either the account or business unit level.

CVSD Calculation:

CVSD is restricted by the Depth of Market in the rehypothecation market. 

CV Adj for internalization are restricted to a specific quantity of stock which can be internalized. 

There is a minimum threshold for Rehyp Rate set as the zero bound.

For assets with the same CVSD, a constant order is observed to minimize the number of seg changes day-to-day. 

Example Selection: To better understand how the CVSD rankings operate, the table below shows how a hypothetical portfolio would be ordered: 

Oy

Outputs