Wells Fargo Íø±¬³Ô¹Ï
Dan Thomas
06 August 2013
Wells Fargo Íø±¬³Ô¹Ï formed a new client trade services group within its markets division, specialising in prime services and OTC clearing. SLT talks to the new head of the group, Dan Thomas, about its creation
Image: Shutterstock
Could you explain a little bit about the new team and how things have been going since you were promoted in June?
We recently created the client trade services group within the markets division of Wells Fargo Íø±¬³Ô¹Ï to bring together two client-facing services—Wells Fargo Prime Services and Markets Clearing and Futures Execution. While the regulations and market structure for cleared products continue to evolve, we wanted to organise ourselves to service our clients in a product agnostic and coordinated fashion.
We also recognised the need created by market structure changes to take a more coordinated approach to our own and our clients’ technology, funding and collateral management needs, by aligning these customer-facing businesses with the funding and liquidity management team within Wells Fargo Íø±¬³Ô¹Ï.
We can offer Wells Fargo clients a broader suite of capabilities including futures and OTC clearing, multi-prime custody, securities lending/margin financing, capital introduction, and comprehensive multi-asset trade execution, and middle- and back-office support alongside our proprietary real-time performance analytics and risk and attribution technology that allows prime clients to aggregate portfolio information across multiple accounts, strategies and prime brokers or custodians. As we continue to build relationships, we will continue to invest in our firm’s capabilities.
How have you seen the market structure for fixed income and equity products evolve?
In equities, Regulation National Market System (Reg NMS) has caused fragmentation that still exists today in the equities marketplace. This fragmentation has created some benefits by intensifying competition, resulting in significant innovation that has been a continued to benefit clients in terms of their explicit cost to trade.
We saw this innovation in the sell and buy side’s development and use of algorithms. Concurrently, with this change in trading behaviour, we also saw the incubation and enormous growth in electronic trading and the advent of high frequency trading (HFT).
In fixed income, regulatory changes—the US Dodd-Frank Act, the Volker Rule and the EU’s Basel III—are altering the market structure of certain fixed income products. With respect to Dodd-Frank, there are two key ingredients that will influence electronic trading: (i) mandated centralised clearing and derivative product standardisation, which is encouraging product innovation and will lead to an increase in ‘on exchange’ trading; and (ii) increased transparency to come from the incubation of swap execution facilities (SEFs), which are expected to be launched in the third quarter as well as from the already implemented mandatory swaps data repository (SDR) reporting. Both of these recent and ongoing developments, combined with real-time trade acceptance will reinforce the trading of listed- and futures-like products.
In terms of Basel III and the Volcker Rule, we think that more stringent trading rules and capital and liquidity requirements could lead to a decline in inventories held by dealers. We also expect to see sizeable increases in margin requirements across the spectrum of clients, which will likely fuel new businesses around centralised funding and collateral optimisation, including significant new developments in collateral management technology.
Do you think that the relationship between prime brokers and hedge funds is changing?
The core relationship between the hedge fund and prime broker has stayed the same: centralised custody and clearing, access to balance sheet, securities lending, operational support, and trading. However, the financial crisis and the associated global securities firm failures shifted the way that managers select and work with their prime brokers. Counterparty credit risk rose to the forefront for hedge fund investors. Hedge fund managers have responded, and today multi-prime and multi-custodian relationships are considered best practice in the industry. The practice of multi-prime, once reserved for the elite, is now standard for all but the smallest managers.
We are also seeing the traditional role of the prime broker expand to becoming a ‘concierge’ to all of the products and services the bank offers. Access to OTC products, specialty financing, investment banking, research and corporate access are a few of the products and services that are standard at the largest prime brokers. These changes (along with others) have created major alterations in how loyalty is earned, and has turned a historically operational relationship into a front-line partnership.
As funds turn towards more listed and centrally cleared products, what will this mean for the hedge fund industry?
Centralised clearing (a new phenomenon in many OTC markets) will accelerate ‘on exchange trading’, which we believe will result in continued product innovation and the central counterparties (CCPs) ending up with a broader suite of products that can be cross collateralised on their platforms.
The CCPs will get the benefit of more straightforward offsets (for example, rate futures and rate swaps), potentially driving prime brokers to adapt with new approaches to help their clients gain collateral efficiencies.
Additionally, the industry will still need well capitalised firms with strong risk management practices that can provide counterparties with stable access to these centralised clearing platforms. Also, centralised clearing has the potential to broaden the pool of market participants that can act as liquidity providers for OTC products as centralised clearing limits the value of counterparty strength for trade execution. However, large users of OTC products may have to adapt how they access that liquidity.
What trends are you seeing in terms of increased transparency and reporting for prime brokers?
Recent market events and the general scarcity of investors have shifted the power from the hedge fund to the investor. The overall investment process has become very data driven and time intensive, requiring more transparency and granularity than ever before. Prime brokers have been one of the hedge fund service providers tasked with providing that increased transparency. Prime brokers are also being asked to conform to new regulations such as Basel III, and the Alternative Investment Funds Directive.
These regulations will require more investment in technology and systems infrastructure. We continue to see that our large institutional investor and pension fund clients are exercising greater influence over decisions that have to do with asset safety issues, including requiring high quality service providers and separately managed accounts for their investment dollars.
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