Banks may be forced to increase their capital broker fees from the typical 1-2 percent to 14 to 15 percent under increasing regulations around leverage ratio.
According to a white paper by Catalyst, Basel III and its leverage ratio rules in particular have placed additional pressure on banks to optimise capital. The paper suggests that many unprofitable clearing brokers have already exited the market, leaving fewer available to provide services.
The paper pointed out that, in the past, banks that operate as clearing brokers may not have fully passed the costs on to their clients, focusing more on security aspects and remaining under-priced. This means that execution and clearing are becoming ‘increasingly divorced’.
With changes in the market in the last five years, the emphasis has moved from the buyers to the sellers, according to the paper. The cost of capital is now more than 12 percent, meaning that brokers are targeting a return of 14 to 15 percent, or 8 to 10 times more than they have charged, historically.
The authors explained how clients that use less of the bank’s collateral will benefit from lower cost, while advising that hedge funds employ intra-fund netting and compression tools.
