Regulatory and cost headaches are leading firms to a search for ways to optimise various aspects of trade types that involve some level of counterparty credit risk, said a recent whitepaper.
Derivatives, securities lending and repo were among the trades given by 4sight as involving a certain level of risk that needed to be offset by optimisation, whether it be of regulatory capital, collateral, counterparty or trade type.
The paper urged firms to consider the cost of capital per unit of profit and loss, as well as the costs involved in funding collateral. It also stresses the importance of knowing whether or not it is more profitable to trade bilaterally or via a CCP, and which CCP is the optimum choice, and asks firms to consider whether the firm could generate more profit and loss by deploying an asset in a securities loan, or by collateralising a derivative.
The paper looks at how to the optimization types are calculated and how they are interrelated.
