Friday 23rd February 2018
February 22nd 2018: Michael van Dulken and Henry Croft at Accendo Markets report this morning that FTSE 100 Index called to open +15pts at 7310, still in a bearish rising wedge pattern, but at least now 7300, making a bullish challenge on 6/7 Feb highs of 7315 overnight, retracing more of that early month sell-off and breakdown. Bulls still need a break above 7325 overnight highs. Bears need to see 1-week rising support at 7300 in jeopardy. Watch levels: Bullish 7325, Bearish 7300. Calls for a positive start to the week come as Asian equities (excl. China and Hong Kong for Lunar New Year) built on last week’s global recovery, even if Wall St closed well off highs (Mueller Russia indictments) to close mixed on Friday into a long Presidents’ Day weekend that is likely to sap volumes today. FTSE is supported by the USD off three-year lows, helping GBP edge further from last week’s highs to offer less resistance for UK blue chips. Note Australia’s ASX higher, but miners in the red, as copper and gold trade off their highs, and despite oil trending higher -RWC Partners says Pierre Giannini will be joining the organisation as part of the ongoing growth RWC sees in Continental Europe. Giannini previously led Daiwa SB Investment’s business development efforts in Southern and Western Europe, where he focused on both institutional and wholesale channels - John Hardy, head of FX Strategy at Saxo Bank says in a client note this morning says, “The US treasury market faces an important test this week with three large auctions of 2-year, 5-year and 7-year treasuries on Tuesday through Thursday and the latest FOMC minutes on Wednesday. The big surprise many noted last week was the fresh highs in US yields failing to derail the ongoing equity market recovery. On the currency side, the narrative is that the US dollar can continue to fall as US interest rates rise because the rise in US yields reflects concerns on the US fiscal/current account balance sheet more than it reflects a strengthening US economy. The US 10-year benchmark came within hailing distance of the huge 3% level last week, widely considered a critical structural chart point – it is hard to believe, last week’s action notwithstanding, that a persistent rise above this level would be met with a shoulder shrug by asset markets, from equities to EM. The most interesting development this week would be strong US treasury auctions that see a sharp drop in US yields as a test of the recent weak USD trend - Aquaterra Energy, the offshore engineering solutions provider, has appointed Christian Berven as business development director, as it strengthens its EMEA operations by opening offices in Stavanger, Norway. Headquartered in Norwich, Aquaterra Energy UK, was the first to secure a multimillion pound investment from EV Private Equity, as part of its pledge last year to support fast-growing North Sea businesses. EV’s investment supports Aquaterra Energy’s global growth strategy and allows it to invest in capex. Berven joins the company following ten years as managing director of Norwegian oil service company, Toolserv - Alliance Etiquettes has merged with wine labeler Groupe Etienne. This is the sixth build-up for the Alliance Etiquettes “buy-and-build” platform created in 2015. Following the operation, Alliance Etiquettes will become the market leader in France of premium wine bottle labels, with turnover of €50m -- SendGold, a Gold-as-a-Service app that enables physical gold investment and payments in a digital environment, will launch its app in March in Singapore.. With the growing demand for gold across Asia, SendGold changes the way consumers can transact gold by allowing the user not only to buy and sell gold but also to send it as a payment or gift to friends or family members via their mobile devices, targeting the 2bn millennials who are in control of 16% of Asia Pacific's wealth -

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Ben Broadley is a Solutions Manager for Advent's Syncova with responsibility for developing the product to meet clients' margin, financing and collateral needs as the market and their business requirements change. Ben Broadley is a Solutions Manager for Advent's Syncova with responsibility for developing the product to meet clients' margin, financing and collateral needs as the market and their business requirements change.

The real cost of centralised clearing

Monday, 06 January 2014
The real cost of centralised clearing Creating a competitive advantage through effective collateral management. By Ben Broadley, Advent Software.

Creating a competitive advantage through effective collateral management. By Ben Broadley, Advent Software.

In Europe regulators are in the process of authorising Central Counterparty Clearing Houses (CCPs) and determining which instruments require central rather than bilateral clearing. The process is expected to run well into 2014.

The new regulations on centralised clearing of bi-lateral contracts and the changing market structure are set to have far-reaching implications for both buy- and sell-side participants in the derivatives market. Under the new structure, entities that trade in OTC derivatives—hedge funds, global asset managers, pension funds, insurance funds and others—must be prepared for higher margin commitments and more frequent margin calls.

Different CCPs will have different asset valuation methodologies and margin calculation models while asset eligibility requirements are also expected to vary; in most cases they are likely to be narrower and more stringent. This means that firms will need to find a way of tracking these different methodologies and eligibility requirements.

All of this would suggest that fund managers need to take a new look at how they manage collateral. Yet because of the lag time in implementation, many are not feeling the impact and are taking a wait-and-see approach, comfortable that they have the capacity to cover margins under any circumstances.

However, they may be in for a shock when these regulations finally come into force: clearing houses are likely to take a harder line than bilateral trading partners on margin amounts and the timing of transfers, while larger funds can no longer expect preferential treatment that typically meant once-a-week or infrequent calls. Dispute resolution is also likely to be more cumbersome with complicated, arms-length relationships, and any firms that experience discrepancies may find they have less or very little recourse.

In the new structure cross-margining opportunities will decrease significantly and funds will no longer be able to net funding of multiple transactions to a single currency while the derivative trade must be cleared through a CCP (previously, funds accustomed to trading both an underlying security and a hedging instrument with a single broker used to be able to take advantage of netting margin for both transactions).

When entering into a trade, funds and brokers will have to consider much more than the sell-side price of the contract. The ‘real’ price encompasses costs of collateral, fees for collateral transformation, cost of carry and other transaction-related expenses. According to a 2013 report from KPMG entitled The Next Operational Hurdle for Hedge Funds—Collateral Management: The Multi-Prime Broker Model Colliding with Regulatory Reform, “Recent industry papers have estimated that the additional collateral burden demanded by Dodd-Frank and EMIR could be over US$2 trillion globally.” And this does not include the added operational strain and the internal costs that will accompany it.

A Case for Proactive Collateral Management

The change in the market structure and transaction flow calls for a significant cultural shift. Where calculating margin used to be a post-trade analytic, it must now be factored in before the trade is placed in order to avoid excessive margin commitments and costs. Firms will be challenged to replicate and validate CCP margin calculations in advance of trades to manage costs and determine where to direct trades in order to optimise collateral. Firms may also need more frequent collateral transformation trades with third parties in order to satisfy the differing asset eligibility requirements of the CCPs. And while certain instruments and transactions will not require central clearing, bilateral trades will have more onerous margin requirements as well under the new regulations.

In this new environment, firms that do not actively manage collateral run the risk of inefficiency, posting higher grade collateral than perhaps was needed, liquidating unnecessarily to cover margin calls, diminishing their trading capacity, and missing opportunities for incremental profit. With a more complex market structure and stricter rules, paying closer attention to margin requirements is clearly in a firm’s best interest. Many firms have already adopted more systematic collateral management practices as a result of the squeeze on returns in the wake of the 2008 crisis.

In volatile markets, when firms are challenged to generate alpha, controlling collateral costs becomes a way of adding incremental profitability to the bottom line. In an Advent whitepaper entitled, "The Impact of Centralised Derivatives Clearing", Mikael Johnson, Lead Partner - Alternative Investments at KPMG, said: “In the competition to raise capital for funds today, investment managers can use all of the help they can get to achieve better returns for their funds and be more attractive to potential investors. If a fund can positively impact its performance by a few basis points (or more) by optimising its collateral management in the new centrally cleared environment, it may very well be worth the effort. While there is a project at hand to change the support processes to optimise collateral management, there are technologies and advisors available to help complete this project at an affordable cost."

New Collateral Management Best Practices

There is no doubt that stronger collateral management places an additional burden on a firm’s operational staff and infrastructure. In order to sustain profitability, firms must find the most efficient way to manage collateral. Best practices have begun to emerge as firms figure out what it takes to manage collateral optimally. These include the ability to:

> Replicate and validate different clearing houses’ margin calculations. As each CCP will have its own margin calculation methodology, fund firms must gain control to ensure that the calculation is accurate, consistent and fair.

> Compare and evaluate different clearing houses’ collateral requirements, in terms of both amounts and types of collateral accepted.

> Identify the best clearing venue for a particular trade in order to minimise initial margin requirements.

> Manage the full range of margin calls, ideally in one platform, from the traditional prime broker and listed futures calls to both bilateral and centrally cleared OTC calls under the new regulations.

> Optimise and pledge collateral in a way, which most efficiently for the firm, satisfies all various requirements

> Track and confirm fees as well as correctly allocate cost of carry and use of capital back to each position.

Why Collateral Transparency Benefits All

Ultimately, the goal of centralised OTC clearing is to bring greater transparency to what was a fairly opaque marketplace before the crisis of 2008—and widely regarded as one of the main causes of the crisis. Greater transparency, combined with competition among CCPs, should benefit all participants. It will, however, put the onus on firms to be more sophisticated and systematic in collateral management, which will have significant impact on operations.

Volatile markets have made effective collateral management a competitive advantage. The new regulations and a more complex centralised clearing environment will make it an imperative. 


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