Central counterparty (CCP) costs are driving the buy-side decisions on where to clear their derivatives trades, according to a new report from TABB Group.
Asset managers are also beginning to understand their choices more than ever before and how they will affect overall dealer margin and settlement costs on the back end, says TABB’s Radi Khasawneh, author of the report.
Khasawneh noted that 2015 was the first year when buy-side firms were truly assessing the cost of clearing. As a result there has been an increasing in ‘client anxiety’ about controlling and monitoring the full cost of trading, found the report.
“Behaviour can, and does change when there is a significant cost difference in the market. This is the interesting dynamic for those wishing to analyse the future clearing landscape.”
As a result of new transparency requirements, it has now become even easier for the buy-side to compare costs between CCPs. According to data from Clarus Financial Technology, LCH.Clearnet has gained and maintained up to 70% of new interest rate swaps trades clearing business.
Data showing margin calculation and dealer costs have allowed the buy-side to compare costs between CCPS in the US, and TABB expects this to occur in Europe once mandatory clearing comes into force at the end of this year.
“This basis effect can be expected in Europe, and more important globally when it comes cross-regional analysis of clearing costs. In fact, there is already a basis emerging in costs between European clearing houses (most notably Eurex and LCH.Clearnet).”
In addition, as the number of clearing brokers, or futures commission merchants (FCMs), continue to drop out of the market, this has led to an “increase in client anxiety about controlling and monitoring the full cost of trading.”
According to data compiled by TABB, the top five FCM’s control 70% of market share in the OTC clearing space, and 55% in the futures space.