Asset managers want to reduce OTC exposure for equity products

“Our study suggests that Custom Basket Forwards (CBFs) can solve the investment trilemma for firms offering a margin efficient, customisable product with low trading costs. As asset managers continue to innovate and meet investor demands for thematic, ESG, and climate investments, the sell-side is well placed to offer access to listed products that can serve these requirements.”

Acuiti, in partnership with Nasdaq, has released a report titled “Solving the Investment Trilemma“, offering insightful analysis into the evolving landscape of ESG and thematic investing in listed derivatives markets.

The report, based on comprehensive surveys and interviews with senior executives from 67 sell-side and asset management firms in Europe, delves into the challenges and emerging trends in equity derivatives markets.

One of its central themes is the exploration of custom basket forwards (CBFs) and their potential to address the longstanding trilemma facing investors: balancing capital and margin efficiency, low cost of trading, and customizability.

Growing demand for listed alternatives to OTC markets

Asset managers are increasingly seeking to reduce their over-the-counter (OTC) exposures for equity products over the next three years. This shift is driven primarily by the cost and complexity of International Swaps and Derivatives Association (ISDA) agreements and the need for greater capital efficiency. The report identifies a growing demand among asset managers for listed alternatives to OTC markets that offer the customizability of OTC products without the associated burdens.

The rise of thematic, environmental, social, and governance (ESG), and climate investing has amplified the need for customisable products for both asset managers and the sell-side.

Investors are facing a trilemma in their quest for tailorable products, with none currently offering the ideal combination of capital and margin efficiency, low trading costs, and customizability.

The report suggests that custom basket forwards could be the solution to this trilemma, enabling asset managers to develop capital-efficient, bespoke products, and allowing sell-side firms to engage new clients and expand their offerings.

Custom Basket Forwards (CBFs) can solve the investment trilemma

Will Mitting, founder of Acuiti, emphasizes the significant role that OTC markets have traditionally played in enabling buy-side firms to construct complex and tailored products. However, the rising costs and complexities associated with OTC derivatives have compelled firms to seek listed alternatives. Mitting points out that Custom Basket Forwards could resolve the investment trilemma by offering a margin-efficient, customizable product with low trading costs.

“OTC market have traditionally played a key role for the buy-side in enabling them to build complex and tailored products to meet the specific requirements of their portfolios. However, the rising costs and complexity associated with OTC derivatives has forced firms to look for listed alternatives. Our study suggests that Custom Basket Forwards (CBFs) can solve the investment trilemma for firms offering a margin efficient, customisable product with low trading costs. As asset managers continue to innovate and meet investor demands for thematic, ESG, and climate investments, the sell-side is well placed to offer access to listed products that can serve these requirements,” said Mitting.

The Acuiti report also highlights an opportunity for the sell-side to promote listed products that meet the evolving needs of asset managers, particularly in thematic, ESG, and climate investments. Banks, in particular, are recognizing the potential in CBFs to engage new clients and offer existing clients new products while bringing greater capital efficiency to the market.

Alessandro Romani, VP, Head of European Derivatives at Nasdaq, comments on the significance of the report. “The Acuiti report provides great insights to the industry trends behind the increasing demand for tailored equity exposures, as well as the challenges and complexity of managing them, with the use of OTC derivatives. With the launch of Custom Basket Forwards, Nasdaq is well positioned to provide Asset managers and Sell-side firms with an alternative solution to OTC equity swaps, based on a listed and CCP cleared derivatives contract”.

The “Solving the Investment Trilemma” report by Acuiti, in collaboration with Nasdaq, offers a comprehensive overview of current market dynamics and potential solutions to longstanding challenges in equity derivatives trading. It underscores the evolving preferences and strategies of asset managers, and the critical role of innovative products like Custom Basket Forwards in shaping the future of the market.

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