Buy-side Firms Should Partner With FCMs, Says Report

Buy-side firms are unprepared for new trading mechanisms, costs and increased complexity and should partner with established providers to adapt to an evolved OTC derivatives marketplace, according to research from Aite Group commissioned by State Street Corporation.

The research surveyed buy-side firms that collectively have $6 trillion in AuM, and focuses on preparations for swap execution facilities (SEFs), central clearing, collateral management and reporting. It also includes suggestions for Category III firms, those that have yet to complete the Commodity Futures Trading Commission’s (CFTC) phased implementation of derivatives clearing.

Research found that Category I firms (companies that have completed the transition to mandated clearing) report that first movers had the advantage to negotiate more advantageous FCM agreements regarding fees and margin requirements, as compared to Category II firms (firms that have also met clearing mandate requirements). Category III firms who have not put agreements in place early will need to partner with well-established FCMs that can quickly respond to their customers.

The study further showed that firms tend to select FCMs based on financial stability and pre-existing relationships. Many firms have only on-boarded with a single FCM and clearing house, allowing only for short term compliance rather than long-term success. Posting initial and variation margin continues to be difficult, with the result that nine out of eleven firms have either outsourced the collateral management function or intend to do so.

Meanwhile, State Street has filed registration documents with the CFTC for SwapEx to become a multi-asset SEF. SwapEx provides multiple execution styles across numerous asset classes, as well as portfolio compression capabilities to help relieve the regulatory burden of higher margin requirements.