Delta One, synthetic financing and synthetic prime brokerage have long been a part of financial markets, but the upcoming introduction of Basel III capital rules is increasing their popularity. On the banking side, the drive towards synthetics meets the need to conserve balance sheet by netting transactions, move trades off balance sheet and/or manage as much flow as possible with low risk-weight counterparties like CCPs. A new white paper from Finadium, free courtesy of SunGard, looks at this growing space and next steps for firms wanting to expand their market presence.
Hedge funds, swaps-based ETF managers and other structured traders are also finding synthetic desks as a viable solution. For the buy-side, whether a transaction is executed using the physical or on a synthetic desk may not matter, so long as costs are low and the market exposure meets the portfolio strategy. The challenge for the sell-side now is optimizing their processes and operations to effectively capture buy-side demand while maintaining appropriate capital, risk and trading controls.
The white paper is available here with free registration.