The planned introduction of the Securities and Exchange Commission’s (SEC) US Treasury clearing mandate next year is prompting hedge funds and proprietary trading firms to take a more active role in clearing their trades, according to a new study – Margin Management and the Rise of Self-Clearing’ from Acuiti in partnership with FIS (https://www.acuiti.io/margin-management-and-the-rise-of-self-clearing/).
The report is based on a survey and interviews with 64 senior executives from hedge funds, asset managers and proprietary trading firms. It documents how these firms are responding to regulatory changes, market conditions, cost pressures, and advances in technology on the post trade front.
It found that the SEC mandate (https://www.jpmorgan.com/insights/markets-and-economy/markets/us-treasury-clearing-mandate) was a main driver for 75% of respondents to reconsider their positions on clearing. Breaking it down, 44% were open to self-clearing in the future, while 12% had already become a clearing member.
The mandate requires the majority of US Treasury market transactions to be cleared through an SEC-approved covered clearing agency (CCA). The aim is to enhance market transparency, reduce counterparty risk and increase the intermediation capacity of dealers.
In February, the government agency extended the deadlines by a year to 31 December 2026 for Treasury cash clearing and 30 June 2027 for repo clearing.
Ross Lancaster, Acuiti’s head of research, and author of the report said,“ With the US Treasury clearing mandate acting as a catalyst, we expect the self-clearing trend to accelerate further over the next five years, although the number of exchanges that firms self-clear on is likely to remain limited.
The report also found that third party platforms are increasingly being used for building buy-side and proprietary trading clearing tech stacks as firms seek to reduce the operational burden of self-clearing.
At the margins
Regulation has also played an important part in the development of margin analysis. It has become more sophisticated with uncleared margin rules embedded in OTC derivatives markets, while there are moves to increase the transparency of margin calculations for their listed peers.
Hand in hand with these changes has been volatile market conditions which has led to dramatic and often unexpected margin calls over the past five years. Market participants have had to contend with a raft of events over the past five years. These included Covid, ongoing wars in Ukraine and the Middle East and shifting macro economic policies, most recently the tariff penalties from the Trump administration,
It is not surprising than that the report showed that 69% of buy-side firms were taking greater control over margin calculations and payments.
Larger firms have already invested in dedicated margin desks and advanced modelling tools. These range from management of encumbered and unencumbered assets to optimisation of both collateral and notional through techniques like portfolio compression. International money market (IMN) date-trading with swaps is also on the list.
Even among those firms whose interest in margin optimisation is more seasonal, there is an ongoing interest in technological upgrades that can improve functions related to margin optimisation. This is particularly the case with real-time data feeds that are becoming essential across front, middle and back-office functions.
Survey results also indicate a trend towards margin optimisation efforts among surveyed buy-side and electronic liquidity providers. However, the extent to which it is deployed depends greatly on whether the market participant is a proprietary trading firm, hedge fund or asset manager, and its assets under management. For example, the tool is particularly popular with macro funds, because any savings they achieve can be used to maximise their leverage.
Moreover, there are variations when it comes to stress tests, with proprietary trading firms much more likely to conduct daily stress testing on their derivatives portfolios while asset managers have a much less frequent approach.
In addition, the report showed that the shift towards cloud-based hosting of technology continues to gain momentum. Almost 40% of firms now hosting core post-trade and risk management functions in the cloud to enhance scalability and data analytics.
Firms may take different paths but as Markus Schmitz, head of cleared derivatives at FIS, points out, those looking to “take more control of operations like margin management and self-clearing will need to take a hard look at their tech stack, and cloud-based solutions are clearly going to be seen as key given the benefits gained in scalability and modularity.”
