Adding value to OTC clearing

As the Dodd-Frank deadline for mandatory clearing approaches, most tier one banks have already established their basic OTC Clearing capabilities using tactical or semi-strategic solutions.  However, banks now need to go one step further and create value-added services that have the potential to draw clients away from other more “standard” clearing brokers.

As CCPs introduce complex risk margining processes and intra-day margin management, the obvious area for focus is on margin and collateral related services to enhance the OTC Client Clearing offering.  

The optimal use of margin collateral is at the heart of Prime Brokerage offerings to hedge fund clientele.  Most major Prime Brokers already have in place the infrastructure to provide value-added services such as margin financing, collateral substitution and cross-product margining.  Given the conservative risk margin requirements of CCPs, these same value-added services are bound to be attractive to potential clearing clients.  The ability for Clearing Brokers to provide their clients with avenues to further leverage their available collateral will be hard to resist compared to those who simply pass on the CCP margins directly to their clients.

A number of issues will however prove challenging to the most ambitious Clearing Brokers. One of the most significant hurdles will be around enabling margin and collateral systems to operate on an intra-day basis as opposed to end-of-day processing. Other challenges include connectivity into numerous CCPs’ trade processing, risk and reporting systems, developing holistic risk exposure measurement methodologies to enable cross-product margining across cleared and non-cleared positions, and positions within the same asset class as well as other product types.

I’ll be interested to see how many of these issues are discussed at the OTC Derivatives & Counterparty Risk conference in London tomorrow.