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P I C T U R E
treasury businesses. Some very large asset
managers, including Blackrock, have gone
further and built dedicated prime broker-
age businesses. The shift away from prime
brokerage at banks is not tectonic but some
are reluctant to hold surplus hedge fund
cash due to its high-flight risk, which in turn
forces banks to hold more capital.
To lend or not to lend?
Financing illiquid or leveraged hedge fund
strategies is also balance sheet intensive, and
banks are now being very selective about the
managers they service. As such, some asset
managers sense an opportunity.
“Treasury functions are becoming a more
common feature at the largest asset manag-
ers, which view these departments as profit
& loss (P&L) centres in their own right.
However, the trend around providing financ-
ing or stock loan is only really the domain
of the bigger asset managers. It is true that
some large asset managers do offer prime
brokerage services. But entering prime bro-
kerage subjects those managers to additional
regulatory requirements. They have to have
a broker-dealer or similar license and the
business is operated under a separate entity,”
said Krol.
Returns at asset managers have been poor
and the provision of financing or stock loan –
obviously subject to full collateralisation - can
provide a regular income to compensate for
substandard performance. Repo activities at
banks have also found themselves punished
by Basel III and a few select asset managers
are scoping out whether to lend out their
excess cash to buy-side firms struggling to
meet their margining requirements for OTC
transactions at central counterparty clearing
houses (CCPs). Lending out excess cash may
become even more appealing once the Basel
Committee on Banking Supervision (BCBS)
and International Organisation of Securities
Commissions (IOSCO) rules on stricter bilat-
eral margining requirements for un-cleared
OTCs take effect across more markets in 2017.
“The concept of cash-rich buy-side firms
lending to each other is gaining momentum,
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and some industry participants view it as an
idea that could take off. The feedback from
the market is that it is interesting, but not
something to use actively this year. Attaining
the correct initial and variation margin to
post as collateral to CCPs or as part of the
BCBS-IOSCO changes to bilateral margining
will require market participants to get hold
of the high-grade collateral, including large
amounts of cash. This can be difficult and
we could see more buy-side organisations
lending to each other,” said Mark Higgins,
managing director for EMEA business devel-
opment at BNY Mellon Markets.
A very select number of buy-side
organisations are transitioning into
market making activity, long the
preserve of banks who again
are having to scale down
their participation in this
area.
Market making
buy-siders
As banks shrink
their inventories,
some large asset
managers are
identifying
commercial
opportu-
nities at
Issue 51
TheTradeNews.com
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