Client's view: Assenagon on the benefits of the Registered Customer status at Eurex Clearing

About René Reißhauer

René Reißhauer is a Senior Portfolio Manager at Assenagon, responsible for absolute-return products. He previously worked for the Systematics division of Allianz Global Investors in Frankfurt. From 2001 to 2009, he was a portfolio manager in the Financial Engineering segment at cominvest Asset Management, where he was responsible for the management of structured products and actively managed derivatives funds. René Reißhauer holds an econometrics degree as well as a DVFA/CEFA Investment Analyst degree. He also graduated from the Chartered Alternative Investment Analyst (CAIA) program.

René Reißhauer: For two reasons: our team at Assenagon always aims to minimize risks and a number of our customers have a very strong focus on safety.

Eurex: In your opinion, why does the Registered Customer status offer a higher level of safety?

René Reißhauer: The general understanding within the market is that exchange-traded derivatives are fail-safe as long as the exchange’s Clearing House (in this case, Eurex Clearing) remains solvent. However, a far greater risk lies in the clearing broker, the bank conducting the clearing of customers’ trades. For us as an investment manager, this clearing broker bears a so-called counterparty risk.

Eurex: What exactly is this risk?

René Reißhauer: At Eurex, all traded derivatives are booked on the customer account (Agent Account) of a Clearing Member (clearing broker), for example a bank. All customer positions of the respective Clearing Member are pooled within the so-called omnibus account. The holder of the account at Eurex Clearing is the Clearing Member. In the case of payment difficulties of the Clearing Member towards Eurex, Eurex directly addresses the bank (i.e. the Clearing Member). Whether positions must be closed directly depends on the bank’s liquidity situation, as payments from the liquidation of positions are conducted between the Clearing House and the Clearing Member. Customers of the Clearing Member must assert their claim for payments and collateral to the Clearing Member.

Eurex: And that’s where the Registered Customer comes in?

René Reißhauer: Exactly. For Registered Customers, each portfolio holds its own position account with Eurex. This ensures the right allocation in case of possible payment difficulties of the bank. In addition, it gives the customer seven days to find a new Clearing Member (clearing broker) enabling the transfer of the existing positions accordingly. Ideally, this alternate Clearing Member was already chosen as a backup at an earlier stage. During the seven-day transition period, the investment firm itself handles the daily account reconciliation.

Eurex: Who has been supporting you on this?

René Reißhauer: At Assenagon, we cooperate with a number of different clearing brokers, due to the different requirements of our fund strategies. Our liquidity management fund products that achieve a money market equivalent yield are the portfolios that require an especially high level of safety. Therefore we contacted the associated clearing broker, which is Commerzbank, and received great support, both from Commerzbank as well as Eurex, in implementing our solution. However, our experience regarding banks’ readiness in this context has been mixed. Due to the higher operational efforts – instead of a single account, each portfolio now requires a separate account – a number of banks have increased their fees accordingly or refrain from offering the service altogether.

Eurex: Starting this summer within the scope of the ISA Direct connectivity model, institutional investors can directly become Eurex Clearing Members to facilitate capital efficiencies. Will Assenagon convert from the Registered Customer model to ISA Direct? ?

René Reißhauer: As of June 2016, we will see the step-by-step introduction of a clearing obligation for standardized OTC derivatives. At the moment, the number of counterparties and Clearing Members (sell-side banks) is declining, while costs are increasing, both for derivatives-related services as well as securities financing transactions. The reason for this development is the high cost of capital due to stricter regulatory requirements such as the leverage ratio, risk-weighted assets (RWA) or requirements regarding the Net Stable Funding Ratio (NSFR). Starting this summer in anticipation of these developments, Eurex Clearing will offer the connectivity model ISA Direct for OTC transactions to meet the requirements of institutional investors. As soon as ISA Direct is also available for derivatives traded at Eurex, we will take an in-depth look into it and assess practicability for our products.

Eurex: How complex was the onboarding process of becoming a Registered Customer?

René Reißhauer: After reaching an agreement with a clearing bank, the implementation process with Eurex was straightforward. But getting to that point lasted a long time: it took more than three years from the first announcement, that an access for Registered Customers for exchange-traded Eurex derivatives would be made available, until conclusion of the first transaction. This was mainly due to the regulator’s legal requirements as well as the legal account management details.

Eurex: Has anything changed for you since?

René Reißhauer: The overall process for portfolio managers has remained unchanged. The clearing broker continues to be responsible for the open positions on a daily basis. In addition, he must now reconcile the external Eurex accounts for every portfolio.

Further changes come with this structure, mainly related in the deposit of collateral and in the entry of the orders. As every portfolio holds its own account, netting effects from other portfolios cannot be applied, which in turn increases collateral requirements.

Furthermore, in the execution of identical orders across different funds, orders cannot be pooled. Every order must be executed and booked individually, which is of particular concern when handling block orders. This order entry method requires a certain minimum number of contracts, which is easier to achieve through the pooling an order across  multiple funds.

Eurex: How would you summarize your experience?

René Reißhauer: Our team at Assenagon as well as our customers are extremely comfortable with this model. With relatively small efforts, we have made a major step forward in counterparty management, allowing us to offer a higher level of safety to our customers – especially in times of volatility or instability.

Eurex: Thank you for the conversation, Mr. Reißhauer.