Deutsche Bank has united several of its existing businesses to create a Markets Clearing group, which will combine its exchange-traded derivatives, OTC derivatives and prime clearing businesses under one roof.
Jonathan Hitchon, previously co-head of global prime finance who will lead the new group, said the formation of the new unit is a result of upcoming legislation requiring central clearing of OTC derivatives.
Global Custodian spoke to Hitchon about the new group.
Can you give an overview of the new Markets Clearing group?
It is a global initiative that covers all asset classes: commodities, foreign exchange, rates, credit and equities. The products covered by the new group include listed derivatives, OTC derivatives and cash products.
What prompted you to reorganize your derivatives clearing businesses?
The move toward central clearing prompted this; our view is that regulatory drivers around Dodd-Frank, MiFID and Basel III will push OTC derivatives into an environment of centralized clearing. Given the breadth and depth of Deutsche Banks trading capabilities, this is a natural extension, and a chance to be extremely proactive and help our clients embrace change. Markets Clearing is a seamless approach to our client base in terms of helping them adopt regulations.
Markets Clearing is a global platform offering risk intermediation, cross-margining, collateral optimization, and platform related technology, client service, reporting and infrastructure. We feel we are uniquely positioned to do this given our scale, global reach and well-known derivatives expertise. We are reorientating the platform in response to changes in regulatory environment.
As head of the new group, where will you be based?
I run a global business, but I am based in New York. Most of the regulatory drive today has been in the US out of Dodd-Frank. 65% of global assets under management are managed out of the US. Strategically it makes much greater sense for me to be here in the US. The US is starting to formulate its rules, whereas we expect Basel III in 2013.
How will the new group align with your existing Global Prime Finance business?
There is an extremely tight and close alignment between this new group and Global Prime Finance. Its a seamless, well-integrated platform.
Central clearing of OTC derivatives has its proponents and opponents, but it is soon to be a fact of life for many investors. The new group is evidence that Deutsche is embracing the changes, but in general, do you believe central clearing is a good thing for the industry?
I think any environment that pushes transparency is a good thing. The whole concept around reporting and putting data together, thats a good thing. On the idea of centralized clearing, there are pros and cons. My own perspective is that by moving into centralized clearing, you shift the systemic risk onto the clearer. There has been a lot of debate in that space, and I think the most important point is, the threshold for being a clearing member should be set at a high bar. It improves the creditworthiness of central clearing as each member firm has to post reserve capital.
You must have the right level of risk management for the various clearing members and rule sets and margins. I dont particularly have a negative view of centralized clearing, provided the relevant credit standards and risk standards are in play and it is an even playing field. Ultimately the far more challenging space will be in defining an SEF [swap execution facility] and pricing and putting trades on the books.
TABB Group released a report yesterday saying the majority of derivatives traders have not prepared for central clearing and other regulatory changes. Are your clients prepared?
On the buy side, its a bit of a mixed bag. Large institutional clients are embracing this concept. There are cases of clients in Europe exempt from the provisions, but who would prefer to have derivatives cleared through a central clearing structure because Basel III has onerous capital requirements and regulators are pushing clients in this direction.
On the sell side, eight different banks and broker-dealers are looking at this, and three or four, including us, are actively thinking through how they will position themselves for clients. Part of the challenge is that the rules themselves are only starting to get formulated by the CFTC in the US, so we still do not know precisely how they will look.
Editors note: For more about Dodd-Frank and central clearing of OTC derivatives, click here to watch the recent video on GCTV.
(CG)