The current pace with which regulatory change is taking place can be overwhelming to buy-side firms. Furthermore, factor in that for firms who have not yet reached a certain size or don’t have the capabilities and systems, they will lack the right infrastructure to clear derivatives (OTC or ETD) or securities financing transactions (Repos) at a Central Counterparty Clearing Houses (CCPs).
This sees many firms outsourcing to clearing brokers. There are a multitude of clearing optimisation options to choose from, giving the buy-side plenty of opportunities to save the fees and costs associated with clearing OTC, ETD or Repo transactions.
But with so many choices and each one promising to show you a smarter way to do things whilst creating a positive return – what is the most efficient way?
Optimisation means different things to different firms depending on the firm in question. You also have to factor in what the aspirations of your firm are.
One of the first steps is to look at the collateral requirements and choose the best asset for each requirement. However, working out the optimal allocation can be slightly time-consuming. It requires running complex algorithms across several aspects. That’s why for many, one of the most relevant ways to optimise, is to decide whether or not to clear in the first place. For some products, this won’t be possible due to the various clearing mandates.
Once you’ve made the decision, you then need to decide where to clear it.
2) Active management of CCP Liquidity Add on
Whilst a product may be eligible to clear at a variety of CCPs, you also have to factor in the liquidity add-on. More and more CCPs are beginning to allocate a charge for this and it’s generally set based on the size of the position in relevance to normal market activity.
For positions that are considered to be large in comparison, the liquidity charge will be greater than the base level of the initial margin. Therefore, it’s imperative to understand just how liquidity add-ons are calculated to minimise margin.
3) Utilising backloading opportunities
It’s useful to determine which trades could be backloaded into clearing which can reduce the initial margin. Backloading bilateral trades is an effective way of reducing Initial Margin and consolidating counterparty risk.
4) Reviewing CCP selection
Finally, one way to optimise your clearing strategy is to review your CCP selection.
“In analysis that we have conducted, differences of over 50% between the margin calculated on the same portfolio between different CCPs is not unusual.” (OpenGamma).
Will your CCP accept the collateral you have available? Have they disclosed enough information and provided sufficient evidence concerning their procedures?
If you’re looking to rethink your clearing strategy and quickly implement industry best practice optimisation techniques where you can to gain savings, then look no further.
At Margin Reform we provide a five-day, remotely supported clearing optimisation program which consists of several low-cost, easily implemented strategies. Conducted from London via video conferencing and calls, this covers in-depth analysis, training, engagement, delivery planning and summing up with a presentation back to senior management on findings
Our “no win no fee” Clearing Optimisation Program has been designed especially for buy-side firms who meet our minimum selection criteria and may need instant consultancy support. We ask for tiered compensation from the savings we identify here.
Get in touch today to find out more. Click this link to book your free 30-Minute Clearing strategy session with Margin Reform