On Nov 7th 2017, OpenGamma ran a unique ‘Derivatives Counterparty Management Best Practice’ event, with panelists from both the buyside and sellside, having experience from BlackRock, Tudor, Citi and CS. It provided a rare opportunity to hear the challenges faced by both parties. Here we share some of the key insights from the event, that outline ‘the critical steps to better derivatives clearing broker services at lower cost.’
Carry Out Research
Understand how valuable a client you are to your brokers. Be aware of your balance sheet usage for each type of business you do, and then understand the key metrics that are driving the relationship.
Understand your counterparties’ binding constraints. Not all brokers are the same; each has different constraints e.g. leverage vs RWA; each has different regulatory interpretations e.g. treatment of cash margin being on or off balance sheet. You need to understand your counterparties’ binding constraints and find the brokers where your business mix fits their constraints.
Investigate market norms. There is wide variation in how clients are treated by brokers, you need to know where you are on that spectrum in comparison to peers. Be aware of the level of service that you can expect for your respective wallet size.
Be smart about how you allocate wallet. You need to leverage the business where you generate high margins for your brokers, and use that to ensure access to services that brokers are less willing to provide. You need to constantly question whether you have the right number of brokers to maximise your access to capacity at competitive cost.
Work with your broker
Push to be looked at holistically across silos. Most banks don’t look at client revenue across business lines, especially for smaller clients. In many cases their hands are tied by their existing structures, but you need to push to be looked at holistically across silos, in order to get the best cost available.
Work in partnership with your brokers in the way you allocate business. Each broker needs a portfolio mix that optimises for their specific constraints; e.g. a simple example is to align your execution and clearing with the same broker putting high margin execution together with low margin clearing.
Be aware of the implication of key legal terms in your broker agreements. These have material impact on your risk. Examples include – your ability to withhold payments if your counterparty defaults, or rights to voluntary port positions in a pre-default scenario.