It’s probably safe to say that, 90% of the time, asset managers will aim to get the same terms with all their clearing brokers. But while the benefits of doing so are undeniable, the situation isn’t always clear cut. In fact, we’d argue that, in some circumstances, having different terms with different clearing brokers is actually a good idea.
One size doesn’t always fit all.
For most fund managers, having the same or similar arrangements in place with all their clearing brokers makes life easier. It’s faster to open an account. It’s simpler. And it helps avoid the risk of being perceived as giving certain funds preferential treatment over others.
From a practical standpoint, it’s hard to argue with the logic behind this approach. Problem is, it treats all trades and strategies in the same way. And this may not always lead to the best outcome for investors.
Let’s say you have an agreement in place with a clearing broker. You’ve negotiated a ticket fee of $20 and a maintenance fee of 0.2% per annum.
Now, let’s say you have two trades. Both have the same notional value — £500,000. But while the first trade will last for a single year, the second trade is for 10 years.
Clearly, the fees are going to impact these two trades differently.
In the second trade, the maintenance fee will have a much bigger impact, because you’ll be paying it for a longer period. So, it may be worth going for a higher ticket fee in exchange for a lower maintenance fee, as this could keep costs down.
On the other hand, the size of the ticket fee is arguably more important in the first, shorter trade.
Different strokes for different folks: the benefits of different clearing broker agreement structures.
Of course, trading is hardly ever as straightforward as our example. But, if anything, this makes an even stronger case for more flexibility.
Notional value and term aside, there are investor requirements, collateral restraints, volume and endless other variables to contend with. So, applying a standard clearing broker fee structure smacks of trying to fit differently-sized objects into the same size box. It saves you a bunch of time and makes everything easier to carry. But does it make sense?
In contrast, having different arrangements in place means you can choose the best fee structure for a particular trade or strategy. In turn, this allows you to keep costs as low as possible and, ultimately, give investors better returns.
More importantly, this approach means you know exactly how much you’re paying in clearing fees per individual trade or strategy — a huge advantage in the current unforgiving regulatory landscape.
Not only does it allow you to keep costs down, but it also allows you to show investors and the regulator that you’re actually doing so.
Matching a trade to the right fee structure.
If you’ve read this far, we hope you’re starting to come around to the idea of diversifying your clearing broker fee agreements. But doing this is only the start. The more important issue is: how do you decide which fee structure would work out cheapest for a given trade?
Finding the answer to this will require sophisticated analysis. All other things being equal, low ticket fees work best for trades with low notional value while low maintenance fees work best for trades with high notional value.
That said, it’s not enough to compare fees. You also have to see how a trade or strategy will impact the whole book.
Ultimately, clearing brokers want to make sure you spend enough with them to justify the time and cost of servicing you. As a result, fees can fluctuate depending on how much of your business a clearing broker has at any given time.
As it happens, Cassini excels at understanding and reducing this cost. Our technology can simulate fees through the whole holding period, comparing ticket prices and maintenance fees and breaking down how they’d be impacted in a range of different scenarios.
Want to learn how we could help you trade more transparently and make your investors happier?