Finadium held its first panel and reception event in Chicago last Thursday, April 23, with our colleagues from SunGard and the Options Clearing Corporation (OCC). The audience was primarily buy-side and sell-side professionals from the Chicago area. The conversation was very animated. Here’s what we talked about.
CCPs. A big focus for the industry as well as our panel was the role of CCPs in securities finance. Anyone paying attention has noticed the Average Daily Volume growth on the OCC’s securities lending CCP. The figure was about $40 billion in 2013; now its towards $170 billion. That’s a phenomenal growth. According to both the OCC and audience participants, the driver of growth has been balance sheet management. The 2% RWA attributed to CCPs is simply too important to ignore when assessing counterparties and capital ratios. Margin on the other hand has not been a big driver of business. While one might think that the ability to cross margin options and securities loans on a CCP might be compelling, the reality is that many firms do not look at these figures. This is partly due to the complexities of the OCC’s Monte Carlo margin calculations and partly due to silos and just not caring. We hear from firms that cross-margin that savings can be impressive but most firms just don’t cross-margin at all.
Pre-trade analytics. Following the conversation about cross-margining, the question came up about whether technology firms are ready to offer pre-trade analytics tools at all. We are calling this concept the Capital Cost Calculator, a one button tool on a trader’s desk that would tell the trader how to manage the next incremental trade. SunGard says that the basics for pre-trade analytics are complete within the APEX Collateral system. A bigger challenge however is integrating APEX with every other internal system necessarily to track the cost of capital. Taking settlement as just one example, a firm’s current trading positions will dictate its cost of capital. If a trader down the row just did a trade, that needs to be factored in to the pre-trade analytics for the next trade. This will never be a perfect science but it is important to know as best as possible what the impact of a trade will be in a capital conscious world.
CCPs for Collateral Transformation. We talked about the mechanisms currently available for CCPs to act as collateral upgrade trade counterparties all in one cross-marginable pot. We are seeing this to be possible but its a clunky trade. For example, a securities loan for equities generates cash. Starting in July that cash can be used to buy Single Treasury Futures, which puts Treasuries into the hands of the original equity holder. Nice trade. Since the OCC will clear both of these transactions it may be possible to cross margin both of them. We wrote this up in our October 2014 research report, “The Central Collateral Funding Desk: A Business Plan.”
Collateral Transfer Pricing. SunGard reported a new wave of interest in collateral transfer pricing, a topic of great interest to us for the last year and a half. They see that in 2013, US firms were working to get the basics of their operations for OTC derivatives clearing correct. Now in 2015 its time to optimize. This includes determining the cost of collateral for individual trades. There was audience agreement that clearing firms are providing liquidity at the base cost of 75 bps in the US. The more that clients can find their own liquidity, the faster they can save that 75 bps. We see securities lending as a natural win here. A GC loan may cost 10 or 15 bps, but that’s a lot better than 75 bps.
The panel ended at the right time but attendees stayed late. Apparently the Craft Beer portion of the evening was compelling draw in and of itself.