2. SPECIAL REPORT: DERIVATIVES
“The buy side works on a
portfolio basis so they think
multi-asset. The sell side
doesn’t necessarily do this
and that’s when you get a
fundamental, almost a
that arises from having to pull together those positions, those
structural disconnect
P&Ls and the client reporting from the back end,” he said. between the buy
However, RBC’s Wilkinson contested some of the
suggestions. “I think the sell side has responded to
and sell side.”
providing multi-asset trading capabilities. It differs
according to whom you trade with but the sell side is
certainly aware of it and developing DMA cross-asset
strains that would reduce the amount of real estate desktop
which is key to the buy side.”
Wilkinson did, however, say that the challenge for the sell
side lies in post-trade management where traditionally MIKE MATHIAS, PARTNER, FINANCIAL SERVICES, INEUM CONSULTING
“everything that has been OTC has gone down a siloed pipe
and has been managed by relevant experts in the back prime brokers and credit concerns generally. The regulators of
offices”. course want transparency.”
He said the biggest challenge going forward is to develop a McDonald questioned whether a generalised usage of
cross-asset clearing capability. “In a bilateral world I still central counterparties is desirable and feasible. He pointed out
think it is important to go down, to a certain degree, the siloed that a push to CCPs has been in a number of areas including
pipe because you’ve got the product experts. As we move interest rate swaps, commodities, climate emissions,
more into a cleared world where we have a central electricity and of course credit default swaps, and for most it
counterparty, the sell side’s relationship with the customer has proved to be a “good model”. But for some products it is
changes. You just give the trade out and it puts the onus more not always desirable.
on the clearing broker to manage the margin process and “Certainly, I would say look at the FX market which is the
manage the risk to a client. biggest and most transparent and the most traded wholesale
“The challenge is going to be how we deal with the new market and no-one really talks about CCP there. CLS works
OTC products that are going to be possibly forced by very well as do OTC derivatives products in a peer to peer
regulators onto the exchanges and onto CCP clearing,” he area. But I would point everybody to look at the initiative that
added. has been launched by CME to see if longer dated FX products
Frewer discussed Fortis Global Clearing’s business, which will indeed be moved to central clearing. We will really see
he said is able to facilitate the clearing of multi-asset and whether the desirability is there with the CME initiative.”
cross-asset classes. “One of the most important parts of this is McDonald warned of excessive drives to standardisation
obviously the risk element. Clients want risk offsets, margin of OTC products. “We always refer the European
offsets and what we have been able to do is create our own Commission back to worries over excessive drives to
cross margin haircut system whereby we can take different standardisation which is very easy to do from a top down
asset classes and create, through various modules, a single macro, prudential approach, but it doesn’t help the end users
index. From that we have been able to expand laterally into all of the time because that’s not what the OTC market is
other asset classes.” about. The OTC market is about wholesaling. When you are
raising money and when you are distributing products, you
SHIFTING FOCUS don’t need to do it incrementally contract by contract. There
is a utility to the OTC market and a utility to trade peer to
Turning the spotlight on that 10-tonne gorilla, discussions peer which might not suit a CCP. So it’s not always
shifted focus to central clearing in OTC derivatives. desirable as you might read in the papers or in the minutes
The WMBA’s McDonald said the shift in the last year coming out of Brussels.”
towards CCP clearing has been driven by the buy side and McDonald also talked about the cost of clearing to the buy
regulators. “The buy side have obviously been incentivised by side. “I don’t think the buy side has appreciated that both the
not only the whole cross margin advantages of putting their processing costs and cross margining costs are probably going
risk onto a CCP, but issues over the credit worthiness of their to be higher than they think.”
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