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
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
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
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
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 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
"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
"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
To hear more on how banks, brokers and FCMs can address
portfolio margining across asset classes, click here to listen
to the webinar.