Cross-margining central to buy-side SEF trading

Use of collateral optimisation services such as cross-margining will decide where asset managers trade OTC derivatives on new swap execution facilities (SEFs), Sean Owens, director of fixed income at consultancy Woodbine Associates has said.

Use of collateral optimisation services such as cross-margining will decide where asset managers trade OTC derivatives on new swap execution facilities (SEFs), Sean Owens, director of fixed income at consultancy Woodbine Associates has said. 

Cross-margining lets a buy-side firm net off opposing risk positions held in a central counterparty (CCP) across a range of products, including for example swaps, swap futures and Treasury futures. This means an asset manager can reduce the overall collateral required to clear these products, reducing overall transaction costs.

“The choices behind trading and clearing will increasingly factor in the ability to cross-margin and these decisions will necessitate a greater use of analytics to evaluate the all-in cost of different types of risk-similar transactions across the lifecycle of a trade,” Owens said, speaking to theTRADEnews.com.

“Calculating these factors will let the buy-side determine what kind of product, where and with whom, to trade,” he said.

Under the Dodd-Frank Act, central clearing for OTC derivatives was phased in over three stages last year, while trading on SEFs began in October with the first mandatory rules under the ‘made available to trade’ rule coming into force in February, requiring market participants to trade certain swaps contracts on SEFs.

Owens said as asset managers continue to adapt to the new market structure of OTC derivatives trading and clearing, the focus would shift from meeting regulations and setting up processes to reducing overall costs.

“For many this will include a migration toward the most liquid standardised and cleared products that offer the lowest trading cost, maximum risk netting and greatest margin efficiency,” he said, adding that the inclusion of packaged transactions on SEFs expected in coming months would further push the buy-side to trade on SEFs.

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