Sunday, 20 January 2019

BBVA signs to swaps clearing utility

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Spain’s BBVA has become the latest bank to outsource derivatives clearing activities to a third party in a sign that regional players are stepping up to plug a gap after larger brokers scaled back.

The Spanish bank has signed an agreement with Sernova Financial, a two-year-old fintech that aims to lower the barriers to entry for exchange-traded and over-the-counter derivatives clearing by recreating the infrastructure and service elements of a traditional clearing broker in a shared utility.

Sernova was founded by former RBS prime broking and clearing heads Venkatesh Ramasamy and Richard Thompson, who moved to Calypso Technology after the UK bank exited OTC clearing in 2014. Calypso, which provides back-office systems to most exchanges and CCPs, is a stakeholder in the clearing utility.

For BBVA, the agreement is aimed at more efficiently managing connectivity across multiple central counterparties and clearing brokers to cut costs and deliver improved clearing services to its own clients.

“This will result in a more automated digital product offering, better pricing and greater flexibility for our customers,” said Ian Downes, MD for post-trade business development at BBVA.


A new market structure poses challenges and opportunities for regional banks. Large dealers that clear derivatives on their clients’ behalf have hiked costs and slashed coverage in response to Basel III rules, which slap hefty capital charges on client margin held against cleared swaps. Deutsche Bank last year closed its US clearing operations, further sapping capacity after BNY Mellon, Nomura, RBS and State Street exited the business.

“Clearing brokers are feeling the pressure from regulation but at the same time regulators want more products to be cleared,” said Sernova chairman Ramasamy. “That means their customers, who are smaller banks, face reduced capacity and have to think about a new set-up.”

For some of those banks, the answer lies in direct clearinghouse memberships that remove dependency on clearing brokers. Others are seeking new clearing relationships beyond the largest brokers, creating an opportunity for regional players.

Sernova addresses both approaches. With DirectLINK, self clearers can access shared services including collateral management, risk management, connectivity and analytics, eliminating the need for heavy in-house investment in people, processes and systems. With InterLINK, regional brokers like BBVA can provide a scalable client clearing service with connection to a range of clearinghouses and accompanying services.

“If you want to provide clearing, you have to think about margin segregation, asset segregation, trade reconciliation and you have to oversee the exposure to the client,” said Ramasamy. “You need hefty infrastructure to do that and it can be expensive. InterLINK addresses that with shared infrastructure, which offers a healthy cost saving.”


The latest tie-up follows similar steps at Barclays and Credit Suisse, which outsourced their post-trade derivatives operations and clearing technology to FIS Derivatives Utility, a shared post-trade infrastructure that was created following the 2015 acquisition of SunGard Financial Systems.

While Sernova offers similar services to its larger competitor, it remains firmly focused on regional banks and buyside firms, where Ramasamy sees further opportunity.

“We believe strongly that there is a growing place for local champions,” said Ramasamy. “These banks are not looking to compete with the top brokers that service thousands of clients, but they are looking to offer this service for their top 10 to 30 customers that use derivatives.”

BBVA is the second bank to sign up to Sernova’s services and at least one other is expected to join in the next three months. South Africa’s FirstRand Securities last year partnered with the clearing utility after becoming a member at LCH for direct clearing of interest rate swaps. Sernova is also in talks with buyside firms.

“Large pension funds have similar issues as they are big users of derivatives and they are facing clearing brokers that are not able to take as much risk as they used to,” said Ramasamy.


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