Self-clearing gains traction as banks continue to downsize clearing units

As banks downsize clearing businesses, clients are turning to other methods including self-clearing.

Clients of large banks are turning to self-clearing as capital constraints and lack of returns forces banks to downsize their clearing businesses, according a recent whitepaper authored by derivatives technology specialist, Contango.

Bank brokerage units, whether futures commission merchants (FCMs) or general clearing members (GCMs), have been forced to rethink their clearing businesses and off-board clients based on returns.

According to FCM figures from the US Commodity Futures Trading Commission (CFTC), banks including Deutsche Bank, Barclays and Credit Suisse have dramatically reduced the amount of client segregated assets they hold for clearing.

Deutsche Bank, which at the beginning of 2014 held over $12.5 billion for its listed derivatives clearing business and was one of the top clearing banks in the US at the time, has seen its client segregated assets drop to just over $3.1 billion as of November 2016.

Those clients affected by off-boarding are seeking other options for clearing, the self-clearing gaining traction over other methods.

“Companies are actively assessing the risks and rewards of self clearing… the opportunity of having direct control over risk management in cleared derivatives is particularly appealing in a world where many banks seem to be losing their appetite for anything outside of plain vanilla,” the study said.

However, clients considering self-clearing must assess the feasibility to ensure they are well prepared, Contango explained.

Operational responsibilities of self-clearing include clearing and trade lifecycle management, margin brokerage processing, reference data management and reconciliation.

The Global Commodity Trade House told Contango self-clearing would require the company to “either recruit very skilled staff or outsource to someone we really trust, both of which create significant operational risk at a time we're already swimming in it."

The whitepaper explained vendor managed operations and technology are most likely to be adopted for the self-clearing process, as it provides a quicker route to market.

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