Standardization to Emerge in Fixed Income Clearing, New Research Finds

As clearinghouses with global reach establish regional entity tie-ins with clearinghouses in the rest of the world, a level of standardization will emerge, TABB Group research has found.

Radi Khasawnesh, the Group’s research analyst and author of the new report, explains that as clearing has become the main priority for buy-side firms trading in fixed income, there is now a bifurcation between clearinghouses with global reach and those with a domestic focus. However, he points out, this domestic focus can lead to a natural domestic bias, specifically for European entities that have the widest universe of accepted collateral.

Global efforts to increase fixed-income trading regulation have thus increased regionalization in the handling of collateral.

The report, “Global Collateral Standards 2014: Breaking Through Regional Silos”, highlights clearing businesses and collateral in fixed income and an expected trend towards the voluntary standardization of fragmented collateral by clearinghouses.

This standardization is happening on the modelling side.

The study involved the comparison of current and expected treatment and acceptability of collateral by region and entity, based on the public disclosures of 12 clearinghouses regarding acceptable collateral, margin treatment and risk modelling.

Khasawnesh says this process has led him to believe that there is now a distinct divergence between global and domestic clearinghouses, given each’s disproportionate levels of focus towards their respective regions. This discrepancy in focus can lead to domestic bias amongst those clearinghouses with a domestic, rather than global, reach, he argues.

The report includes graphically represented data based on published margin schedules and methodologies, as well as margin circulars and risk calculators.