FINANCING & MARGINING - Roll of Honour
Of respondents to this year’s Survey more than 75% expect their overall leverage to stay the same over the next twelve months. However, with only 3.5% anticipating a decrease and six times as many an increase, the bias would appear to be towards slightly more rather than less financing going forward. The position has stabilised on both sides of the financing equation. Some of the more highly leveraged strategies are less popular as a result of the generally increased cost of funding. Meanwhile prime brokers have become more aware of both the costs and advantages of providing financing to hedge funds.
With the question of availability of funding now better satisfied, clients are once again focused on flexibility of collateral (type and levels), financing rates and efficient management of margin requirements. Not surprisingly the question on rate competitiveness elicited the weakest scores (5.89 on an unadjusted basis against 5.98 for the category as a whole). By contrast respondents appear to be happiest with the flexibility of different collateral options, itself facilitated by better systems and controls within prime brokers themselves. Scores for the category were almost identical to the overall Survey result and the decline from 2013 levels was 0.15 points. This meant that Financing moved from being marginally below to marginally higher than the Survey as a whole.
Given the close relationship between Securities Lending and Financing in the minds and activity of many clients it is perhaps not surprising to find two of the three Roll of Honor names common to both categories. BNP Paribas scored at consistently high levels with small and medium sized clients in North America and Asia. A typical client endorsement was
“This is definitely a strong suit for BNP. This is where the bulk of our business is with them and they have been great to work with.”
“The margin department is great.”
“Financing and margin are a particular strength though perhaps less important for us than other clients”
|Overall level of satisfaction with financing and margining||5.95||5.71|
|Availability of collateral options||6.02||5.76|
|Flexibility of collateral options ||6.04||5.76|
|Competitiveness of financing rates||5.89||5.63|
|Efficiency and accuracy of margin management ||6.04||5.82|
Around 10% of BNP Paribas clients believe that financing is the most important service offered by prime brokers. Among this group BNP Paribas scored well with very high marks on the accuracy of margin calls. One or two questions were raised in terms of rates being charged but availability of financing and collateral flexibility tend to trump mere ‘cost’ in the minds of most respondents in terms of what is important.
Access to financing and Competitive rates accounted for one in seven mentions among factors that might induce consideration of change. If financing requirements do not grow and prime broker commitments do not decrease then there may be no immediate demand to change for the sake of better rates and/or more leverage. Should the market turn again however, this could become a more important competitive advantage than it is today. In the meantime Access to financing was mentioned as a top priority by 10% of all respondents, ranking as the fifth most important aspect in evaluating services. Financing rates were mentioned by a further 8% meaning that financing overall accounts for nearly one in five of all mentions. Across hedge funds the category accounts for one in six mentions, comparable to Capital Introductions. Overall therefore it remains an important component of overall services, albeit one where differentiation among and between major players is relatively hard to generate at present for all but the very largest and smallest clients.