Eurex Clearing has published a study looking at maximising capital and cost efficiency through an integrated cross-product central counterparty (CCP) clearing service.
The study was supported by and commissioned to Oliver Wyman, a global management consulting firm.
The study reviews how new capital and collateral requirements impact derivatives and securities financing markets. The analysis shows that netting efficiency, default fund structure and collateral efficiency are core drivers for capital efficiency.
Sell- and buy-side participants alike can substantially lower their capital and funding cost by actively pooling clearing business on an integrated cross-product CCP. Besides achieving savings from cross-margining OTC and listed derivatives, significant efficiencies may be realised from cross-product exposure netting, an integrated default fund structure and collateral management services.
“The decision how to optimally allocate exposures across CCPs is the critical driver for sell- and buy-side participants in order to maximise efficiencies. Our analysis provides for the first time a full in-depth quantification from the perspective of a market participant. The results show that Eurex Clearing’s approach to create an integrated cross-product offering allows substantial cost savings,” says Matthias Graulich, chief client officer of Eurex Clearing.
New regulations to strengthen the safety and resilience of financial markets such as Basel III, Capital Requirements Directive IV (CRD IV) or EMIR increase capital and collateral requirements for derivatives and securities financing transactions. The study includes detailed case studies for typical portfolios of a global and a regional bank as well as for a mutual and a hedge fund and quantifies the cost components for interest rate derivatives, repo and securities lending exposures.
For these asset classes an integrated cross-product CCP structure with a broad collateral spectrum can deliver up to EUR4bn to EUR5bn incremental cost benefits to the European sell- and buy-side community combined.