How Much Is Central Clearing Really Costing You? Part 3: Cost Reduction

By Jennifer Liu, Capco

Originally published on TABB Forum 

Cost is becoming a more important driver in profitability. Here are 4 ways firms can cut the cost of central clearing. 

This is Part 3 of a three-part series exploring the cost of central clearing to various market participants and potential ways to reduce the cost. Part 1 focused on direct clearing members (DCMs). Part 2 focused on the clearing brokers’ (GCMs and FCMs) perspective. 

In today’s regulatory environment, revenue is not the only factor with an impact on profit margin. In fact, cost is becoming a more important driver in profitability.  To comply with central clearing mandates and maintain a sustainable clearing business, banks/dealers need to take a closer look at their clearing operations, especially the cost structure.  And some might be surprised by what they find.

On the other hand, there are opportunities for cost reduction. Here are a few examples:

• Maximize use of collateral – CCPs may have different rules/charges for different types of collateral. For example, some CCPs charge lodgement fees for securities collateral but pay interests for cash collateral, whereas other CCPs do the exact opposite. Different CCPs may also have different haircuts for the same type of securities collateral. (In this case, banks/dealers should pledge the securities to the CCPs, which will apply the lowest haircut.) Understanding the rules and setting up a collateral management strategy accordingly could be a great way for banks to save collateral and funding cost.
• Bank charges – Settlement/payment banks usually sell banking services in a bundle. For example, one payment bank offers a package that not only includes wire transfer payments but also online access, 24-hour customer support, on-demand statements, etc. Though they are nice to have, some of the services are not essential and can be very costly. By carefully reviewing the specific charges and removing the optional services, clearing members can save a significant amount of cost. This is especially true for FCMs/GCMs, as they typically set up multiple client accounts at the settlement/payment banks. Their aggregate savings, consisting of individual savings multiplied by the number of the accounts, can be substantial.
• Consolidate service providers – Instead of using different providers for different CCPs, banks can evaluate the existing vendor relationships and identify potential candidates to provide services across CCPs, which will help reduce the service cost.
• Streamline internal operations – As banks/dealers on-board to an increasing number of CCPs, it is time to re-evaluate their operating models. Is there an overlap or redundancy of functionalities performed by different teams? Are there multiple technology platforms that can be optimized? These are some good questions for the business management to consider.

As we conclude this blog series, we would like to encourage all market participants to contribute their thoughts on this topic. An efficient and transparent market is not just a dream, but a goal we can all help to achieve.