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In the second half of 2023, Cassini, the only company to provide front-to-back margin and collateral optimization for derivatives, has witnessed a pronounced shift in client priorities towards collateral cost management and the strategic allocation of available assets for collateral utilization. This emerging trend underscores the impact of the evolving high-interest rate environment, compelling derivatives users to reevaluate their asset portfolios and reassess fees associated with third-party collateral management. This transformation is poised to extend well into 2024. Cassini firmly believes that the global spotlight will remain on inflation and interest rate markets, anticipating sustained volatility, irrespective of impending rate hikes or reductions.
Liam Huxley, Founder and CEO of Cassini, reflects on the market dynamics of 2023, stating: "While 2023 has seen relative stability in terms of volatility, it has posed significant challenges to global economic growth, primarily due to the prevailing high inflation and elevated interest rates. For our clients, this has translated into not only higher margin requirements but also an escalated cost associated with securing their collateral. It is evident that this surge in costs resulting from the elevated interest rates is, at the very least, a medium-term trend, necessitating proactive management by buy-side firms to safeguard portfolio performance from any potential drag."
From a wider market perspective, regulatory statements about the importance of centralized and transparent margin requirements, mandatory clearing, stress testing of margin and the exploration of margin optimization through cross-margin arrangements are set to persist. Huxley remarks: “Whether it is the Bank of England issuing directives regarding stress testing in the aftermath of the LDI crises, DTCC and CME enhancing their cross-margining offerings for treasuries, or the SEC’s proposal for centralized clearing of repo, it's evident that the industry's unwavering attention on margin-related matters will endure in the years ahead."
The heightened funding pressures have undeniably accentuated the spotlight on the expenses associated with derivatives trading and underscored the critical significance of an efficient margin and collateral management process throughout the entire trade lifecycle. Consequently, it is anticipated that organizations will increasingly prioritize technology solutions designed to yield cost savings in both margin and collateral management, ultimately enhancing liquidity management capabilities.
