As the "types of assets' risk" of the clearing client can be categorised the danger that the clearing client gets back other type of asset as originally provided to the clearing broker as margin for a client transaction.
Usually, it is the matter of the client clearing agreement but particularly in the event of the clearing broker default, if the clearing client is due a payment, he may not receive back the same type of asset that originally provided.
This situation may be caused by the wide spectrum of factors, among others:
- the CCP having wide discretion to liquidate and value assets and make payments in various forms,
- the CCP simply not knowing what form of asset the client originally provided to a clearing member as margin for the client transaction,
- resulting from any asset transformation services the clearing member may provide to the clearing client.
Under the principal-to-principal clearing model a clearing member of the CCP is required to transfer assets to the CCP in respect of the CCP transactions related to clearing member client's transactions.
However, as these two relationships:
1) between the CCP and the clearing member, and
2) between the clearing member and the clearing client
are governed by the two different legal agreements, the CCP collateral and margin strategy and procedures applied with respect to clearing members may significantly differ from that applied by the clearing member with respect to its clearing clients.
As is market practice, clearing members have autonomy (perimeter thereof delineated by the client clearing agreement) regarding types of assets to accept from their clearing clients as margin for client transactions.
Such a structure forms a scope for potential collateral transformation services provided by the clearing brokers to their clearing clients, under which the assets transferred by the client to the clearing broker are transformed before passed onto the CCP (the core of the problem seems to attached to applied haircuts).
European financial authority ESMA has explained that it is not sufficient that the individually segregated account at the CCP identifies only the value due to the account of the client - it must identify the specific assets (e.g. the particular or equivalent securities) due to the account of the client.
Alternative approaches to segregation that identify only the value due to the accounts of the clients (while recording the assets provided for the account overall) may, pursuant to ESMA, be offered in addition, provided they meet the relevant requirements of Article 39 of EMIR, but they do not meet the requirement to offer individual client segregation.
However, as was evidenced above, even in the case of individually segregated account, the the clearing client may potentially, under certain circumstances, never see again the concrete collateral provided to the clearing broker on account of transactions cleared by the CCP.