In new research, TABB Group estimates buy-side firms need to deposit
approximately $2 trillion in cash and other eligible assets at central
counterparty clearinghouses (CCPs) to comply with the new clearing
requirement for swaps.
"Capital is a scarce resource that cannot be squandered by
overestimating a margin call, "says Will
Rhode, director of fixed income research at TABB, who co-wrote "Margin
Call: New Risk Tools for the Buy Side," with contributing analyst Sol
Steinberg. "Efficient collateral usage will become an integral,
growing factor in a firm's investment and hedging strategy as improved
risk analytics come of age."
Across 50 one-to-one conversations with US-based asset managers, hedge
funds, banks and insurance companies dealing in interest rate swaps
(IRS) and/or credit default swaps (CDS), TABB identified industry
leaders gaining a competitive advantage by using new, improved
back-office technology, specifically risk analytics, collateral
optimization and faster trading processes.
Already doing so, 33% of the firms selected their FCM (Futures
Commission Merchant) based on the strength of their technology platform.
By integrating with the buy-side's clearing workflow, the FCM hopes to
increase their stickiness and become the primary clearing agent of
choice. Additionally, 80% of the firms calculate their margin
requirements based on the CCP price or the CCP's risk valuation tool.
Nearly 40% says they do not validate their margin requirements. In terms
of swap portfolio valuations, 11% say they'll validate their prices
gainst the CCP price; while 22% will rely on the pre-trade, mid-market
(PTM) marks provided by dealers. Further, more than 25% of buy-side
firms pre-fund their swaps portfolio to ease pressure on internal
process. While they do not want to deal with intraday margin calls,
pre-funding means there will be less capital to trade.
According to Rhode, the cost of a swap transaction may dramatically
exceed the bid/ask spreads displayed in a screen because different
clearinghouses charge different margin amounts and accept different
types of collateral, each with their own "individual haircuts" and
processing fees,. "When it comes to execution, understanding the cost of
a swap from a margin and risk perspective is by far the greater concern
given the broad disparity in risk calculation methodologies at the
clearinghouses as well the sheer variety of collateral types - from
cash, to treasuries, to gold, to corporate bonds."
Based on the interviews with firms representing an aggregate of Assets
under Management (AuM) of $18.1 trillion, $7.6 trillion (42%) of which
is allocated to fixed income, TABB has pinpointed four key trends:
The more precise the buy side is in understanding risk, the better it
will be at optimizing funding, with the potential to repurpose freed-up
capital to fund more lucrative trading opportunities. Some are finding
that a front-to-back solution is in order, one that covers the entire
OTC trade life-cycle, as well as across all groups. Meanwhile, others
are stitching together disparate systems from multiple vendor and
FCM-provided tools. Those furthest behind the curve are in pure catch-up
mode, utilizing every available resource just to stay compliant.
In the report, TABB profiles the following firms:
As capital gains greater consideration in the months ahead in the buy
side's overall ability to hedge and deliver alpha to investors, TABB
sees the rise of the new collateral officer, the CO, "After the
execution decision is made," says Rhode, "The ability to allocate
collateral rapidly and optimize its use will be achieved through a
central collateral use decision-maker."
The 27-page report with 28 exhibits is available to TABB
Group Research Alliance Fixed Income clients and qualified media at http://www.tabbgroup.com/Login.aspx.
For the Executive
Summary or to purchase the report, write to firstname.lastname@example.org.
About TABB Group
Based in New York and London, TABB
is the research and consulting firm focused exclusively on capital
markets, based on the interview-based, "first-person knowledge" research
methodology developed by Larry Tabb.
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