Rule Financial, a business and IT consultancy, has launched Margin Analytics Accelerator, a suite of tools for clearing over-the-counter (OTC) instruments aimed at limiting the costs that buy-side firms face on the back of new regulations.
Market participants in the US and Europe will have to trade OTC derivatives using central clearing counterparties (CCPs) under proposals put forward by the European Commission and US regulatory bodies the Securities and Exchanges Commission and the Commodity and Futures Trading Commission.
By introducing clearing via CCPs for OTC derivatves, firms will be required to post collateral as initial margin to protect against default and variation margin and movements in contract price. Initial margin is not commonly required for long-only funds in bilateral deals currently. Collateral for initial margin has to be secure assets, such as government bonds, while cash is used for the variation margin.
Inefficiencies in calculating margin will lead to increased costs for fund managers. “The Margin Analytics Accelerator looks at a CCP's potential future exposure calculation, then matches that against the firm's internal margin requirements,” says Kevin Neville, head of prime services and securities finance at Rule Financial.
This not only gives the firm more timely control over collateral, it allows it to evaluate the pricing of clearing brokers. “If an asset manager is not a direct clearing member it will be operating through a broker which will be levying margin that is either passed on from the clearing house or it is calculating itself,” added Harjap Bal, principal consultant at Rule Financial. “What this tool enables the buy-side to do is replicate the margin model of the CCP relative to the broker and calculate any mark up.”
A study by custodian BNY Mellon found that 38% of buy-side respondents were unable to price their derivatives internally, limiting their ability to manage collateral, which Neville says is “outrageous”. “Collateral is going to be key to this game. And if you cant price your collateral, optimise your collateral and move your collateral you are going to be out of the OTC game.”