Global Custodian Clearing and Settlement Issue 2018 | Page 25

[ M A R K E T
in place. They are having the balance
sheet and liquidity benefits, and for
the smaller players that can’t manage
multiple repo accounts, it gives them
a better liquidity profile.”
However, the extent to which all of
the buy-side are taking part in volun-
tary clearing has been limited, says
Nick Rustad, global head of clearing
at JP Morgan, in which the major-
ity of activity in NDF and inflation
clearing has been the inter-dealer
community.
“The banking and inter-dealer com-
munity has been active in non-man-
dated voluntary cleared trades,
however you have yet to see demand
from the client clearing side reach
that level.”
“For OTC derivatives, demand is
still in those mandated categories
i.e. G4 interest rate swaps, some
emerging markets currency swaps
and index CDS. The most client
interest for non-mandated products
are in instruments where there is a
cost and liquidity difference at the
point of execution. If that changes or
you get to a point where banks only
want to quote on a cleared basis, you
may see a shift to voluntary clearing,”
says Rustad.
Certainly, a lot of buy-siders have
taken a wait-and-see approach, each
one interested in moving to clearing
but wary of being the first mover.
Furthermore, smaller-sized asset
managers and hedge funds may not
have the infrastructure in place to
clear their trades or even the tools to
quantify the impacts of the collateral
requirements on their portfolio and
the cost differences in moving to
clearing.
Commerzbank’s Scott believes it
is up to their sell-side partners to
provide these tools and help facilitate
this move.
“It is therefore incumbent upon the
service community, i.e. custodians
that offer clearing services, to be able
to help clients in both understanding
and impact assessment,” says Scott.
“Once the commercial and coun-
terparty risk benefits are better un-
derstood, there should be no reason
R E V I E W
|
D E R I V AT I V E S
C L E A R I N G ]
“The most client interest for
non-mandated products are
in instruments where there is
a cost and liquidity difference
at the point of execution.”
NICK RUSTAD, GLOBAL HEAD OF
CLEARING, JP MORGAN
why you wouldn’t move most of your
activities and operate in a cleared
world.
“Early on Commerzbank developed
a ‘what-if’ scenario capability where
clients can backload or frontload
their portfolios and see the specific
impacts in terms of balance sheet
and pricing. However, across the
buy-side community this capability
is generally lacking, as they do not
have sufficient tools and expertise to
properly assess and for many it’s not
mandatory for them to do so.”
It is also on banks and other clear-
ing infrastructures to provide both
the access and the capabilities for
the buy-side to move into clearing.
Direct clearing models are large step
to help this, but take-up has been
very slow. Furthermore, liquidity will
continue to be one of the main de-
terminations for where the buy-side
clear and what banks they use.
“Given these new products are
being established all the time, there
are more clearinghouses expanding
in to OTC. However, some clearers
are struggling with scale, and this is
where more client clearing volumes
will concentrate with the top FCMs,”
adds JP Morgan’s Rustad.
BNP Paribas’ Smith says it has
become easier for banks to clear bi-
lateral derivatives, given most banks
went through a learning phase with
the first set of products. However,
there remains challenges on the risk
management side for client clearing,
such as whether the default manage-
ment processes are appropriate for
certain products.
“FCMs and CCP’s will have to adapt
their products, but clients will want
their banks to be able to clear a wide
range of models and be involved
in various access models to CCPs,”
Smith says.
To a large extent, the ability to
venture into voluntary clearing is
there amongst the buy-side. The
tools are there for the larger players
that have the scale to clear their
bilateral trades, but for many that are
in wait-and-see mode, they will have
to rely on their banks and brokers to
migrate from bilateral to a cleared
world. Furthermore, even for those
larger asset managers, voluntary
clearing will mean a rejig of broker
relationships.
“For large and active OTC players
this means that clearing is some-
times spread across multiple clearing
relationships. The move towards
voluntary clearing will lead to organ-
isations being more strategic towards
their clearing brokers and who they
partner with,” says Scott.
Summer 2018
globalcustodian.com
25