In an increasingly capital constrained environment, portfolio margining has come under the spotlight like never before. The ability to reduce margin required to hold positions without increasing risk is a key frontier in the battle for efficiencies in modern markets.
In a webinar on 22 October, panellists discussed the trend towards multi-asset trading portfolios and asked whether banks, brokers and FCMs can meet client demands and increase efficiencies through a holistic view of risk and a more efficient margining regime.
Setting the scene
At the same time that global regulatory change increases capital requirements for trading many instruments, the buy-side is increasingly seeking to trade a wider spectrum of products and asset classes.
Rebecca Healy, a senior analyst at Tabb Group, said: "The biggest challenge for the buy-side today is the never ending search for alpha. Automation is spreading through the asset classes and giving more options to the buy-side."
Many on the sell-side are playing catch-up with their clients. Traditionally many firms have operated with different asset classes being managed within different silos. This siloed mentality has slowed down the buy-side's ability to realise its ambitions in a multi-asset class trading environment says Healy.
The regulatory push to move more OTC products onto electronic trading platforms is only going to accelerate the trend towards multi-asset class trading from a single screen. This trend is driving new processes and enabling brokers to develop news services for their clients.
Portfolio margining is such a service that is helping the buy-side maximise the potential of their portfolios across asset-classes. But to offer portfolio margining safely, brokerages need to ensure that their internal operations are structured in such a way that enables them to get a view of risk across their various departments.
"The challenge for brokers today is about how to help clients use what they have in the most efficient way. Brokers need to provide the cutting edge their clients are looking for in terms of risk analytics and margin efficiency," said Healy.
A new age
The age of the siloed business model is over. Firms today need to have a holistic view of their entire operations and be able to manoeuvre resources across the enterprise. Some firms have already gone through the process of breaking down the silos.
Andrew Ross, head of European clearing at Morgan Stanley, said: "We rationalised all our clearing businesses and put them into our prime brokerage business. We moved our listed clearing business, our OTC clearing business and our FX prime brokerage business into one consolidated group."
Breaking down the silos is not a simple process though and involves numerous choices and challenges both internally and externally.
Philippe Ramkvist-Henry, head of cross-asset risk solutions at SunGard Front Arena, said: "A lot of our clients are in the process of trying to break down silos.
"Firms want to offer better services to their clients. They want to have margins for all asset classes presented in the same way, they want to have a view of risk across a client's portfolio."
Portfolio margining and risk management are intrinsically linked. Brokerages will need to understand a client's risk profile across asset classes in near-real time to deliver the most efficient, secure portfolio margining offering.
"Clients are working in a fragmented landscape across asset classes and across systems. They might even have multiple systems for the same asset class. They have a good risk view per system but not the complete view they need," said Ramkvist-Henry.
"We are working with several clients to bring into the front office information that was only visible in T+1 and move that into near real time. We are looking at collateral and understanding how brokers can offer trading at a cheaper price and how brokers can offer greater cross-margining services and additional services such as margin financing."
As more instruments are traded electronically, the opportunity to offer cross margining effectively increases. However, firms should be cautious in their approach to cross margining.
"We offer cross-margining to clients but you have to think about when you can cross margin," said Ross. "If you have two related products such as a US treasury against an OTC swap you need to be able to liquidate them as a package.
"The danger with margining across asset classes is that correlations can break down, especially in times of market stress. If you portfolio margin across asset classes and the margin is too low, you end up at a loss."
Striking the right balance is essential and core to that balance is monitoring risk and exposures across the business. Risk management is moving from a commoditised offering to a USP and visibility is the differentiator.
Ramkvist-Henry said: "Cross margining has been in the hands of the exchanges and CCPs thus far. We are putting it in the hands of the brokers. Naturally the brokers need to have full visibility and transparency into the margins they are posting at the exchange as well.
"The market is moving in the right direction and clients are demanding better services and lower collateral commitment. Across the back, middle and front offices the change is happening."