Uncleared margin rules unlikely to clarify clearing migration
FX prime brokers are expected to adapt to the pricing challenges of uncleared margin rules, but it remains far from clear whether these rules will push the market definitively in the direction of central clearing.
A report published by Citi earlier in April stated that uncleared margin rules (UMR) costs could seriously impact returns for FX prime brokers unless offset through pricing or other efficiencies.
Its analysis of UMR funding costs for a non-deliverable forward trade suggested that brokers have substantially underpriced transactions that will be in scope for the rules.
Traditionally, clients posted initial margin to FX prime brokers who, in turn, did not post initial margin to execution brokers, thereby creating a capital inflow.
After the full implementation of UMR, FX prime brokers will no longer benefit from the liquidity of client initial margin since it will need to be segregated.
At the same time, these brokers will be required to post and segregate initial margin to both their clients and their executing brokers for FX derivatives, which will lead to capital outflows.
“We will probably see some prime brokers change their business models, maybe offering a tiered pricing plan for different products or pursuing partnerships to function as a clearing prime broker, offering services for both cleared and uncleared products,” says Jon Vollemaere, CEO of R5FX.