OTC Derivatives Clearing Summit: Some FCMs charging five times more than others, says panel

Fees charged by clearing members can vary wildly – and low-cost providers may try to terminate relationships if they prove unprofitable, panellists warn

The prices charged by clearing members for client clearing services can vary dramatically, with some quoting fees that are five times higher than others, according to speakers at Risk's over-the-counter derivatives summit in New York earlier this week.

With many of the regulations related to clearing only recently finalised, a standard fee model has yet to emerge, speakers said. For instance, the Basel Committee on Banking Supervision only published interim rules on the capitalisation of bank exposures to central counterparties (CCPs) in July, which included some significant changes to how banks must calculate the capital they should hold against default fund contributions.

Meanwhile, CCP default fund calculation methodologies are in flux, partly in response to new regulations, such as the Commodity Futures Trading Commission's open access rules, which limit the minimum capital requirements clearing houses can set for membership. In response to that rule change, SwapClear – LCH.Clearnet's interest rate swap clearing platform – increased the size of its default fund earlier this year.

It's not clear how far clearing members are altering their fee structures in response to these changes, but there are also a number of idiosyncratic factors that may have an effect, such as the size and composition of the client portfolio and whether a portability agreement is included. The end result is that fees can vary dramatically from one futures commission merchant (FCM) to the next, speakers said.

"We've gone through the process with clients, and the amounts that are quoted can vary by up to 500%. That is what we have seen in our observations. But because the way these arrangements are charged for varies, it really depends on your portfolio and business," said Samuel Ely, partner at consulting firm Gamma Derivatives Solutions.

Mark Szycher, vice-president for enterprise risk management at GM Asset Management, agreed fees can differ by large amounts, but suggested this could also be caused by risk appetite, with more conservative firms building in a buffer to take every contingency into account.

We've gone through the process with clients, and the amounts that are quoted can vary by up to 500%

"I think what ends up happening is some of the clearing members say, ‘Well, let's not worry so much about Basel III and let's not build all those things in'. They just build in some baseline cost estimate that perhaps is on the low side. They don't consider all these contingencies that might hit them later and eat into their margins. Conversely, there are other clearing members that take a more conservative view – that is, ‘What if Basel III hits us with capital charges, what if this happens, what if that happens?' They end up building in the worst-case analysis so they don't get locked into a fee schedule where they are literally losing money every time the client trades," he said.

That could prompt the FCM to terminate the agreement, forcing the customer to look for a new provider of clearing services, Szycher said.

"That is the worst possible situation – you have a partner who has contracted with you to do something but desperately wants to get out of it. They'll find a way, don't worry – in pages and pages and pages of execution agreements, they will find a way out of it," he said.

A possible solution might be to push for a baseline cost, but to agree with clearing members to cover any unforeseen costs, Szycher suggested. "Some kind of baseline-plus-contingency pricing may help everyone become more comfortable they are being treated fairly – what you are costing them, you are willing to provide them," he said.

Other speakers agreed costs are an issue, but argued buy-side firms should not be wooed by clearing members that offer the lowest fees.

"From my perspective, fees are important, but the more important thing is to have the relationship down the road. If you are building a relationship with a clearing member and you are clearing swaps that have a tenor of 30 years, if you see people coming to you with very low fees trying to get you in through the door, you have to be careful and ask yourself the question whether they will be around three years from now," said Atanas Goranov, managing director and derivatives risk officer at Guardian Life Insurance Company of America.