Regulatory Wars Phase V – The FinTech Strikes Back….Part Two - VERMEG

Regulatory Wars Phase V – The FinTech Strikes Back….Part Two

Previously on Regulatory Wars Phase V – The FinTech Strikes Back…. A long time ago in a galaxy far, far away…It is a period of civil war.  Rebel FinTech spaceships, striking from a hidden base, have won their first victory against the evil Galactic Regulatory Empire………

As Obi Wan Kenobi once said “Don’t be too proud of this regulatory terror you’ve constructed. The ability to destroy collateral mobility is insignificant next to the power of the FinTech Force” Now, it’s time for Luke to unleash the power of the fully operational FinTech battle station in order to attempt to restore order to the Galaxy…

Restoring order to the Galaxy……what are Luke Skywalkers Jedi FinTech solutions……

Clearing and Consolidation of CCP Clearing Operations

Mandatory clearing began for the sell side in 2016 and has rolled out with differing levels of success. CCP’s set initial margin to reflect their estimate of the riskiness of the underlying transactions. For the buyside one of the main challenges is that they often do not have direct access to the CCP’s and therefore need to decide on clearing brokers – several of whom are currently reviewing whether to withdraw client clearing services.

The leverage ratio capital requirements make clearing derivatives on behalf of clients more expensive for the dealer banks. They now have to consider the number of trades they are willing to clear, allocation restrictions, credit and concentration limits & the number of clients they are willing to clear on behalf of.

Fortunately, there are now some new market participants coming into the market place that are offering hosted solutions for client clearing, geared towards smaller participants that may not be able to clear through large dealers. By provided a hosted or “cloud based” infrastructure the new participants therefore remove technical burdens and by providing subscription-based models ease the cost implications enabling wider access.

Many organisations still operate separate collateral pools to manage margin. Often this means the structure does not enable CCP margin netting & compression to realise collateral & cost efficiencies for revenue generating opportunities & can result in suboptimal use of collateral inventory. If you include CCP margin calls & settlement liquidity, then there is potential to utilise your triparty collateral arrangements to service a wider pool of business needs.

Firms looking to achieve the benefits and efficiencies of clearing need to choose which CCP for which asset class and consider pre trade margin technologies as to their choice of venue and ongoing margin impact.

Triparty and the use of Triparty Collateral Services.

Historically these services have tended to be used to service specific business areas such as securities lending or repo. This leads to the management of separate collateral pools for the majority of institutions, particularly the larger sell side firms. Now, with the new IM requirements the use of triparty segregation is expanding to the bilateral OTC market. If fed into a cross asset inventory firms will now have access to view data across multiple business lines for asset selection.

In reality, the industry is still some way from standardisation particularly as every triparty or custodian has a slightly different format for SWIFT messaging which can make the configuration somewhat burdensome. Clients drive for standardisation is often restricted by the drive for competitive advantage as end users request bespoke calculations, statements, financing and eligibility criteria flexibility. Rather than relying on the cheapest to deliver algorithms clients often demand bespoke rules around optimal allocations.  Recent changes have meant more advanced organisations are no longer relying solely on triparty selections as the best use of their assets, choosing instead to make their own decision and include a wider inventory which includes bilateral asset pools.

Join us again in a few weeks’ time to discover more of Luke’s strategy to ensure law and order is restored to the galaxy, thus preventing the Republic falling under the control of the Dark Lord of the Galactic Regulatory Empire…….