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Everyone knows that January is the month of New Year’s resolutions – so why not set some for work as well as home?
To help you get started, we’ve come up with two resolutions that will help you better manage your trading costs and see a greater return in 2019:
Dedicate time to reducing your margin costs
New Year’s resolutions are generally concerned with self-improvement – losing weight, getting fitter – so how about cutting costs to increase your return on capital? One of the easiest ways to do this is by reducing the margin you’re posting. However, to do this you need to really understand the ways in which margins are calculated.
For CCPs to cover liquidity and concentration risk they may all need to charge additional margin, especially for large positions. But the margin charged by different CCPs for the same products can vary by surprisingly large amounts, particularly considering they cover the same risks. For instance, charge rates can differ as much as 50%.
With that said, it’s worth looking closely into which parties you’re using solely from a margin perspective. In the analysis we have undertaken for clients, we have found that moving as few as 10 positions between clearing brokers can lead to a 25% reduction in initial margin. This can equate to hundreds of millions of dollars released for further trades.
In addition, significant margin reductions can be made through cross margining: offsetting positions to accommodate for risk. So, ensuring your trades are most effectively allocated between brokers is key to seeing greater return.
Get ahead of regulation
Another go-to resolution is to become more organised by having a clear out at home or finding a better way to organise tasks at work. In the world of finance, the equivalent could be preparing for changes in regulation.
The 2008 financial crisis resulted in strict new regulation across the financial industry, part of which is mandatory clearing and margin requirements for non-centrally cleared derivatives. For fund managers, this means needing to understand the SIMM Methodology and how to use it to calculate initial margin for uncleared OTC derivatives.The margin charged by different CCPs for the same products can vary by surprisingly large amounts Click To Tweet
From new clearing obligations to margin requirements on bilateral portfolios, new costs exist which need to be understood and new tools need to be put in place to validate and monitor change in initial margin. It’s vital for institutional managers fully understand the impact new regulation can have on derivatives trading, to ensure they continue to be successful.
Many big firms are already clearing as much as possible to ensure that they are on the right side of regulators and remain competitive. In doing so, they have seen the many benefits to clearing; reduced credit risk, standardised pricing, increased liquidity and netting and lower margin requirements.
However, many institutional managers have been able to avoid clearing so far. The start date for these firms has been extended multiple times on top of exemptions which have been extended twice, but this won’t go on forever – eventually there will be an obligation to clear in September 2019 and 2020.
There are several reasons smaller firms have delayed clearing – perhaps saving on clearing costs, avoiding the posting of initial margin, or having no access to clearing providers – but given the eventuality of these rules it’s important to understand the impact sooner rather than later.
Make a resolution
So, what have you got to lose?
Better understanding the costs and regulations surrounding your derivatives trading could mean big savings for 2019.
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