Is cross-asset the new sell-side model?

Is cross-asset the new sell-side model?

Philippe Ramkvist-Henry, solution manager, cross-asset brokerage, SunGard’s capital markets business

There are many signals that brokers are adopting a cross-asset view of client activity to mirror their clients' way of working. The traditional sell-side organization with asset class-based siloes doesn't align with the buy side’s behavior, which often works across asset classes. This discrepancy obstructs the sell-side from efficiently servicing its clients.

In fact, according to a recent news story, consulting firm McKinsey recommended that banks move from a trading architecture that is based on assets to one based on capabilities: “The way banks traditionally structure their business models by asset class can lead to inefficiencies, duplication or missed opportunities at all stages of the business system.”

The ability for sell-side firms to provide efficient trade management across all asset classes, including portfolio valuation, risk mitigation and client margin calculation, will also enable them to efficiently allocate collateral on behalf of the buy-side client. On one day, a client may trade equities with the requirement that the trade be FX-hedged. The next day, the same client may be trading a single stock future, an option on an index future, a credit default swap or a convertible bond.

Banks like Nomura are bringing their trading desks closer together to gain efficiencies and better allocate capital, which can also help them increase the level of service to their clients.

Through conversations with banks and brokers, we certainly see a growing demand from sell-side firms to differentiate their broker service model and offer increased capital efficiency with portfolio-level valuation risk management and margin calculations. Having a consolidated view of a client's portfolio across assets and markets enables a broker to have a more precise view of risk and exposure, making it possible for the firm to efficiently calculate margins by considering netting and correlation effects within each portfolio.

Moreover, if a broker is unable to efficiently monitor risk and collateral allocation, it could face excessive costs of collateral and sub-optimal hedges for its buy-side clients. So sell-side firms also need to re-address their offerings to ensure that they can deliver a robust risk mitigation framework.

As sponsors of FOW Derivatives World Asia 2014 in Hong Kong, SunGard surveyed participants to understand what their position is on cross asset risk and margins. The results revealed that:

· 53% of respondents see a need to consolidate client activity into a single platform.

· 50% currently don’t have a centrally managed real-time system

· 38% are considering cross-asset and cross-market margining

In order to offer optimized margin and trading capacity, brokers need to calculate risk and exposure in real time and have access to this information pre-trade for the buy side to be able to leverage the increased trading capacity. To do this, brokers must consolidate their client activity into a single platform that will allow true cross-asset and cross-market trade and risk management.

Last but not least, by better understanding risk in real time at the client's portfolio level, brokers can increase efficiency by moving to a more electronic collaboration. They can also offer more informed investment advice and products recommendations that help optimise their clients' trading strategy.

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