their clearing members. Additional problems occur for clients who have
a portfolio of global market positions, so it becomes almost impossible
for clients to perform margining themselves.
For larger volume clients, a solution may be for them to use a recog-
nised futures system for their own processing and accounting. Systems
such as Sungard and Rolfe & Nolan may be available on a bureau
basis so that clients only pay for the use that they make of the system.
These systems should have all of the margining capabilities already
established.
Single currency margining and settlement
For clients trading in various different markets around the world and
having numerous currencies to move, the settlement process can be
quite cumbersome. Therefore, many clearing brokers offer a service
known as single currency margining.
This involves the deposit of one currency, which is equal to or more
than the total amount of currencies due.
In order to calculate this, each currency is notionally converted to
the base currency chosen by the client as the preferred settlement cur-
rency. Interest would normally be received on the currency deposited
and would be charged on the currencies, which are in debit. Both the
clearing broker and the client, as the amount due in the settlement
currency is only calculated once overnight, using the end-of-day FX
rates incur an intra-day FX risk. Therefore, if this service is offered to
many clients it needs careful control by Operations management to
ensure that FX risks are properly managed. Even major currencies
need to be monitored so that the Management Team is aware of expo-
sure to each currency. Additional problems can be incurred with some
of the minor global currencies, as these are not always readily available
for use. It may be useful for the clearing broker to have an agreement
for single currency margining which stipulates which currencies are
included under normal use and what should happen for the excep-
tional currencies.
Although no formal charge is made for this service, clearing bro-
kers recoup their expenses through the interest rates that are paid
and received. They need to be relatively competitive in order to make
the service viable but they are designed to cover at least all of the
financing costs that the broker incurs on behalf of the client. From
the client’s point of view it makes the settlement process much more
efficient and in particular reduces bank charges and administration
for foreign transactions.
140 Clearing and settlement of derivatives
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