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Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
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Over time, the likelihood is that many of the models
they build will become analytics that sit on top of a
more interoperable set of systems that can direct
supply in a more automated manner. Today, because
of the legacy organizational structure in many of
these banks, there is little interoperability across
the systems in different silos. In the future, aligned
data models and workflow tools will provide bridges
across the multiple sets of systems that underpin
these combined organizations. This will allow clients
to more easily consolidate data into custom reports
and to instruct the transfer of assets across the
various parts of the organization while still ensuring
all necessary segregation and compliance.
Tracking the progress of various banks toward
achievement of this goal will be important in coming
years as this idea of supply optimization takes hold.
The Caveat: Regulatory Impact of the
Net Stable Funding Ratio (NSFR)
The impact of Basel III capital rules were discussed
earlier and we highlighted three key impacts likely
to impact the lending markets: 1) a push toward
extending to longer tenor trades for transactions
that bring in assets with high risk weightings due to
the impacts of the leverage coverage ratio (LCR); 2)
capital impact of needing to hold aside more assets
on balance sheet against match book trades under the
supplemental leverage ratio (SLR); and 3) the change
in accounting methodology around the risk weighting
of assets provided as collateral for indemnified
loan transactions and the impact on lenders’ ability
to offer indemnification. To some extent, each of
these rules will push the market to embrace change,
but that change is seen as something that can be
accommodated without threatening the underlying
dynamics of the lending markets.
The same may not hold true for the net stable funding
ratio (NSFR). The NSFR would require banks to
maintain an amount of available stable funding or
ASF over a one-year horizon that equals or exceeds
their required stable funding or RSF, that is, assets
and off-balance sheet exposures that are illiquid over
a one-year horizon. Different kinds of transactions
would receive RSF and ASF factors based on their
liquidity. The most recent proposal, intended to be
implemented by 2018, would not count stock loans
to clients as ASF, but would attribute a 50% RSF
factor to the corresponding stock borrow from a third
party. Final rule-making in this regard is still pending,
but those involved in the lending markets should be
closely following this issue.
“ More of the discussions I am having relate to the
optimization of collateral. We are sitting with
clients to figure out what their collateral needs
are and we try to meet those demands as cheaply
as possible. We are working with clients as their
collateral management agent,” — Agent Lender
“ A lot of work is needed to make the various
collateral parts of an organization come together
for optimization. The challenge will be on how you
incentivize custodians to make those investments
in a market that is paying you less than before,”
— Industry Trade Association