Nordic institutional investors such as pension funds increasingly choose to clear their OTC derivatives, regardless if they are legally bound to do so. This is one trend within clearing that Danske Bank, one of the few Nordic clearing brokers, is pointing towards in this article on where OTC derivatives clearing is heading.
The financial crisis rolling in the late ‘00s caused regulators globally to identify a number of systemic issues to be addressed. This led to various new legislative regimes such as MIFID, EMIR and CRD IV, where specifically EMIR addresses the market infrastructure governing OTC derivatives trading.
With EMIR, and most recently the updated EMIR refit, came mandatory clearing, easier access to clearing, and a requirement to increase market transparency overall. This - together with the Dodd Frank regulation in the US and similar regulation elsewhere - led to a new clearing landscape, where a large share of OTC rate swaps have now moved into the clearing space.
The state of OTC derivatives clearing has changed some since the early days, Danske Bank’s Head of Investor Services, Michael Holmgaard Mortensen, says:
“We came from a much lower level of OTC derivatives clearing, whereas now, in line with the legislative intent, this area has moved one way only, and that is up. Although many are not subject to mandatory derivatives clearing, we particularly see more and more pension funds voluntarily deciding to clear their OTC derivatives. These funds control significant assets whose management entails comprehensive risk. They look for efficient means to take out risk, and clearing represents an excellent tool to reduce such risk in relation to counterparties”.
Michael Holmgaard Mortensen, Head of Investor Services
Danske Bank an early starter
Danske Bank early on identified the new regulation to be a business enabler. Back in 2014, the bank took its first steps to design a new business area called “Investor Services”, originally in close collaboration with a single customer. Today, Danske Bank is one of the few Nordic banks that offers a full suite of post trade services, helping institutional investors to be regulatory compliant, efficient and allowing them to focus on their core business.
Michael Holmgaard Mortensen has been heading the Investor Services journey from the outset and has been building the road while driving it. The Investor Services offering nowadays consists of products such as ETD/OTC Clearing, Custody, Depositary Services, Collateral Management, CLS etc. across the Nordics. The offering is supported by a strong value chain community within the Bank that combines expertise to service customers end to end.
Larger institutional investors have more than one broker
Another trend that Michael Holmgaard Mortensen is pointing at is for larger institutional investors to have more than one clearing broker. This is simply to diversify their risk.
“We often see the constellation of one clearing broker in the Nordics and one global bank. The advantage of using a home market broker is staying power through years where global banks might retrench to home markets and - given the fact that they are local - they hold Scandi currencies expertise. On top of this, Nordic institutional investors tend to appreciate a local partner, who is typically also their house bank.”
What do institutional investors look for?
As legislation has kicked in, Danske Bank continues to scoop new customers in the clearing space. They request a collaboration partner that offers the desired local expertise, advisory and capabilities, but usually they also have other demands:
“They generally put an emphasis on the fact that OTC derivatives clearing is part of our strategic offering and that we are here to stay. We have seen large global banks exiting from OTC clearing altogether, leaving clients in a pinch having to secure and migrate to new clearing brokers,” Michael Holmgaard Mortensen elaborates.
What else to look out for when searching for the right clearing broker match?
“You should consider the particular strongholds of your prospect provider and their accessibility. I would look for someone who has a strong operational and technical set-up that will relieve you of regulatory requirements. In our view, why not choose someone who offers a wide range of post trade services, which can be combined? By doing so, you will obtain synergies such as less admin, more seamless regulatory compliance and cost efficiencies,” Michael Holmgaard Mortensen concludes.