Buy-side firms are facing a hike in fees from clearing banks seeking to pass on the financial pinch from ultra-low interest rates and post-crisis regulation.
Research out this week shows clearing banks are facing increasing pressure from post-crisis reforms. Rules on derivatives clearing and other reforms have shifted additional risk onto clearing banks and custodians.
The report from Morgan Stanley and Oliver Wyman suggests that, with ultra-low interest rates in Europe, clearing banks and custodians are facing new challenges in relation to collateral management.
According to the study on the asset management and wholesale banking industry, it said: “Earnings are under pressure from low interest rates and a historical tendency to absorb risk and extend services without capturing sufficient revenue benefit.
“Growing concerns over the risks now absorbed by custodians and clearing banks, and the response to these, could have implications for corporates, the buy-side and sell-side alike.”
“Hoped-for growth from new services – most notably collateral management – has not lived up to expectations.”
As a result of the potential hike in clearing costs, this could lead to some companies being unable to access central clearing, according to a recent report by the Bank of England.
“Some UK firms are finding it difficult to gain access to central clearing on cost-effective terms. The Bank is concerned that some may decide to cease hedging interest rate risk: for example on fixed rate mortgage lending,” the Bank said in the report.
Banks are also having to re-price in certain core businesses in order to reduce their balance sheet exposure. This is has been most evident in the repo market. However, the study says that re-pricing in certain derivatives have become difficult for banks.
“Listed and cleared products struggle with re-pricing fixed fee structures, or face downward margin pressure from new transparency requirements.”