Standard Life Investments’ global head of trading, Steven Swann, believes direct clearing for derivatives is not economically viable for asset managers.
Speaking to The Trade Derivatives, Swann said becoming a direct clearing member of a central counterparty (CCP) conflicts with the business model for the buy-side.
“We considered that [direct membership] when we initiated the clearing project internally, however I don’t believe it is economically viable for any asset manager to build the required infrastructure to commit to the guarantee fund at the clearing house,” says Swann.
“None of that is consistent with our business model, or any other asset manager. Using a panel of clearing members is the most appropriate model for us and that is what we have in place.”
With mandatory clearing of OTC derivatives fast approaching for the buy-side, and continued retrenchment of banks providing clearing services, European clearing houses are weighing up a form of sponsored direct access to buy-side members to work around capital and default fund requirements.
Earlier this year Eurex launched ISA Direct, a direct access model for the buy-side. It will allow pension funds and insurance companies to post collateral directly with the clearing house, while its default fund requirement is covered by the clearing agent/bank.
Swann also said the price of central clearing will drive activity at CCPs.
“The price of clearing is going to be a recurring theme. Last year we saw the basis differential between LCH and CME blew out… we have seen it in Japan as well, and it is definitely a factor that will drive decision making in terms of where to clear and how we execute in the market,” he adds.
In addition to clearing, Swann is also keeping an eye on new potential liquidity providers, as banks look to contract their services in the face of heightened costs. However, Swann argues that the buy-side will not see a role in providing liquidity to the derivatives market.
“I think it is difficult in the derivatives space to introduce the same type of innovation we have seen in equities, such as the peer-to-peer platforms. It simply won’t work in a derivatives context,” Swann explains.
Swann took over the role as global head of trading in 2015, replacing Jim Conway who retired after 17 years at the investment arm.
For the full interview with Steven Swann, look out for the next issue of The Trade Derivatives.