Home / How widespread clearing will help big super funds

(pictured: Jerome Kemp)

The world of derivatives clearing has been in transition since the global financial crisis as the number of banks and others prepared to participate has about halved. But, the 80:20 rule applies and the cleared market appears to be expanding again, according to Citi, perhaps the biggest player in the world.

Jerome Kemp, global head of futures, OTC (over the counter) clearing and collateral at Citi, and the vice chair of the global Futures Industry Association, is a champion of the cleared market. He points out that, if you can clear a product, the prices tend to be more reflective of a true market position.

He says: “Due to capital pressures and non-cleared margin rules there is an increased incentive to clear, as reflected in prices of derivatives.”

For Australian managers and super funds, changes are afoot too. There is currently a bill before parliament to amend the SIS Act, which will enable super funds to clear OTC derivatives in the same way as they can for futures.

AFMA (Australian Financial Markets Association), the industry body, has been promoting the case and, according to Ian Nissen, Citi’s head of futures product for the Asia Pacific region, says there is some hope this will be passed into legislation before parliament is dissolved as Australia heads into an election in the second-half of the year.

Nissen, an Australian based in Singapore for Citi, says the proposed changes are critical for super funds to be able to clear their OTC derivatives transactions. It will also allow for a more efficient reduction of risk, through the use of derivatives, and ultimately save the members money.

Kemp and Nissen were in Australia last week talking with clients. Kemp says that it is imperative that we do as much as we can to make it less onerous to have a cleared market. Before 2008 there were about 145 US-registered FCMs (futures commission merchant) dealing in the market, now there are about 70, Kemp says. But, the larger ones, such as Citi, have picked up the slack. “None of the big players have exited,” Kemp says.

Nevertheless, Citi decided on some “radical re-thinking” of its value proposition to fit the post-crisis world. It has pioneered with the regulators, for instance, the ability to take the cash collateral off its balance sheet and return the proceeds (interest) back to clients. Counter-intuitively, cash tends to have a negative impact on a big bank’s balance sheet in the eyes of the regulator. The innovation in collateral management has meant that Citi’s business has grown against the market trend.

Kemp says that Citi has been engaging with counterparties as well as clients to educate the market about OTC clearing. He says that Australia is an important market for Citi and he wants the firm to actively engage with the market, as a leader in the field.

Kemp’s business falls under the umbrella of Citi’s securities services (including custody) business unit in Australia, headed up by Martin Carpenter.

“The world is changing,” Kemp says. “In the past we have tended to work in silos. With ‘Investor Services’, it’s all tied together. Our goal is to interact with each client at every stage of the life cycle of the trade.”

With its collateral management services, Citi also participates with the post-trade action, as a fiduciary to its clients and providing a further feedback loop to the custodian – which will be either Citi itself or another party.