Five ways for portfolio managers to cut costs
14 December 2012 London
Image: Shutterstock
A new paper from BNY Mellon in association with banking consultants Rule Financial examines the impact that a reform of the OTC derivatives markets will have on all users of those instruments.
The paper, which is entitled ‘To Clear or not to Clear…Collateral is the question’, looks at what avenues are open to institutional investors who—with the advent of the US Dodd-Frank Act, the European Market Infrastructure Regulation and other equivalent rules—face substantial business and operational challenges around executing, clearing, collateralising and reporting OTC derivatives trades.
The paper outlines five additional steps that portfolio managers may take to achieve the goal of cost limitation:
• Review OTC derivatives strategy to establish which cleared contracts will be used
• Model the initial margin requirement of the current or projected OTC derivatives portfolio
• Identify all incremental costs under the new rules
• Consider strategic and tactical changes to the investment process
• Evaluate service offerings that can mitigate costs.
Jonathan Philp, specialist in OTC clearing and collateral management at Rule Financial, said that one effect from a portfolio management perspective is the increase in collateral that must be provided to support OTC derivatives activity, whether cleared or not.
“The danger is that the perceived benefits of central clearing are overwhelmed by the unintended consequence of the costs of compliance being passed through to the policy holder and pension scheme member, for example, whether in the form of constrained, sub-optimal portfolio decisions or the direct costs of adapting to the new market structure.”
The paper, which is entitled ‘To Clear or not to Clear…Collateral is the question’, looks at what avenues are open to institutional investors who—with the advent of the US Dodd-Frank Act, the European Market Infrastructure Regulation and other equivalent rules—face substantial business and operational challenges around executing, clearing, collateralising and reporting OTC derivatives trades.
The paper outlines five additional steps that portfolio managers may take to achieve the goal of cost limitation:
• Review OTC derivatives strategy to establish which cleared contracts will be used
• Model the initial margin requirement of the current or projected OTC derivatives portfolio
• Identify all incremental costs under the new rules
• Consider strategic and tactical changes to the investment process
• Evaluate service offerings that can mitigate costs.
Jonathan Philp, specialist in OTC clearing and collateral management at Rule Financial, said that one effect from a portfolio management perspective is the increase in collateral that must be provided to support OTC derivatives activity, whether cleared or not.
“The danger is that the perceived benefits of central clearing are overwhelmed by the unintended consequence of the costs of compliance being passed through to the policy holder and pension scheme member, for example, whether in the form of constrained, sub-optimal portfolio decisions or the direct costs of adapting to the new market structure.”
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