An Investment Manager is required to deposit margin with the Clearing Broker to cover credit exposure. There are different methodologies that can be utilised for the margin settlement process using one or more currencies.
Multi-currency margin is the process whereby you have margin accounts open for each individual currency. The main advantage of multi-currency margining is that there is no cost related to converting from the exposure currency to the margin currency. A disadvantage is you would be required to have multiple margin moves per fund/account each day, this is operationally time consuming and added costs for volumes of SWIFT messages required to be released daily.
Single currency margining (SCM) is the process which is more frequently implemented by Investment Managers and many banks. Single currency margining requires only one margin move a day per fund as opposed to multiple for multi-currency margining.
For example if you have a fund where the working currency is EUR which trades EUR, GBP and USD futures you could have one margin account (at the clearing broker) where all exposures get netted and on a daily basis margin calls made in EUR only.
Investment managers often adopt single currency margining due to multiple factors such as:
- A reduction of costs of SWIFT messages which only require one movement in the working currency of the fund
- Operational more efficient involving less work
- Netting of exposures between currencies sometimes reducing the overall margin amount required
Many Clearing Brokers offer a service where they can execute the cross-currency net margin trade on your behalf and most importantly reduce settlement and FX exposure. FX risk is managed by executing an FX in the non-working currency (local currency) back to the working currency at a frequency agreed by all parties.
Portfolio & crypto margin enhancements
Highly developed risk-management product enhancements including portfolio margining, allowing parties to trade across all instruments (cross asset)— spot, margin, futures, swaps and options — from within one account. This allows parties to trade with any instrument using all their purchasing power even including crypto currencies now. Portfolio margining means netting exposures across multiple assets in multiple currencies to a single exposure amount. This leads directly to single currency margining which is benefit for all parties.
Steps to implementing single currency margin
SCM can only work where the right legal framework is in place, including:
- A common master agreement between the investment manager and the Clearing Broker across multiple funds
- A margin agreement for each fund which allows netting of risk into a single currency
- Permission to net risk across multiple funds – and given these are all within a single investment manager is easy to achieve
- The ability to calculate the margin requirement for a single fund across multiple assets into a single working currency
Key Benefits of Single Currency Margin
- Wide industry adoption and service for banks, service providers and investment firms
- Operationally effective and scalable
- Reduces currency exposure with the clearing broker
- Reduced volume of transaction processing, resulting in cost reduction and increased operational efficiency
Contact Prodktr if you would like help with SCM