Results Of 2010 Global Custodian OTC Derivatives Prime Brokerage Survey Published

This year one topic has dominated the OTC derivatives prime brokerage business: the coming of centralized clearing of OTC derivative trades through central counterparties (CCPs). The G20, US Congress, and the European Commission all support mandatory centralized clearing of standard OTC derivatives contracts. ICE, the CME Group, LCH. Clearnet have been expanding their offerings as a result, and the Anglo-French CCP is also promising a CDS clearing service by March 2010. In fact, the major OTC derivative dealers reported to regulators that more than nine-tenths of new credit derivative trades were being submitted for clearing. They also disclosed that more than a third of the gross notional outstanding in the OTC interest rate derivatives markets was cleared and another two-fifths could safely follow their example. The dealers have committed to increase the proportion of cleared business. So clearing of OTC derivatives is happening already and is bound to expand. This has profound implications for every aspect of the business, everywhere, from the front office to the back. There remains considerable uncertainty about exactly which contracts will ultimately be clearable, and what capital requirements will be imposed on intermediaries that service those that are not. But the initial concern that the impact of centralized clearing on OTC derivative prime brokerage would be entirely negative-who needs a prime broker if you are required to use a CCP-has abated. It has given way to a sense of the size of the opportunity to service bilateral clients that have never used an intermediary, but will now need an agent to interface with the CCPs. However, that sense is tempered by the knowledge that clearing presents challenges as well as opportunities. Service providers have not just to keep clients informed of a changing regulatory environment that can undermine investments as well as expectations, but to adapt documentation and pricing schedules, and then transition clients on to new services. As the increased number of providers taking part in the survey this year indicates, the OTC derivatives prime brokerage industry is already becoming a lot more competitive than it was 2 years ago. If CCPs empower smaller broker-dealers, by eliminating counterparty credit concerns, it will get still more competitive, making the results of our survey even more relevant.

The survey, in its second year, collected responses on behalf of 15 OTC derivatives prime brokers. On the basis of this data, we were able to rate four prime brokers, and discuss a further four. OTC derivative prime brokers are eligible for top-rated and commended ratings and best in class awards in a series of size, strategy, regional and OTC derivative agreement categories. Both types of award are available in five different asset sizes (less than $100 million, $100 million to $1 billion, $1-5 billion, $5-10 billion and more than $10 billion); by single strategy and multistrategy respondents; in three regions (Europe, North America and Asia); and by seven different types of OTC derivative prime brokerage agreement (foreign exchange, credit, commodities, interest rate, equity derivatives, equity return swap, and cross-product agreements). In the survey a top rating is based on securing an average weighted score superior to the average weighted score for all providers in the survey in that category, while a commended rating is based on a mixture of scores, comments and other factors.

OTC derivative prime brokers are also eligible for best in class awards, which single out providers for excellence in servicing clients in each of eight service areas (client service, credit intermediation products and counterparties, portfolio margining, foreign exchange prime brokerage, operations, reporting, technology, and value) in the 17 separate categories listed above. To be eligible for a best in class award in any category, a provider has to secure a minimum number of responses in that category, and a weighted average score in any service area (such as client service) in any category (such as Europe) that is equal to or better than the weighted average score of all providers in that combination of service area and category. Including the overall Global category, providers are eligible for up to 136 best in class awards.

To see the full survey results, subscribers to GlobalCustodian.com should click here, but the summary results are: