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August 8, 2013

What are Your Selection Criteria for Choosing a Clearing Member and Clearing House?

Over the coming 18 months many firms who choose not to join a CCP directly, will need to choose a Clearing Member (CM) to provide them with access to a CCP. Once ESMA and National Regulators announce the first wave of mandated products, ensuring access to clearing will be an urgent priority.  Each firm will need to pick a CM, but based on what criteria?  Some of the decision criteria may include:

  • Cost of services: What charges does a CM make? Per trade? Funding costs etc.
  • CCP Coverage: Which CCPs does the CM provide access to?
  • Product Coverage: Aligned with CCP coverage, which products can your CM clear? It is self evident that if a CM can't clear the products you trade, there's not much point working with them
  • Net Settlement: Can the CM net down your settlement flows into a single currency for the morning calls?
  • Web Portal: Does the CM provide an easy to use and functional web based 'portal' which you can use to manage your business with them?
  • Simple Integration: How much work is needed to integrate your systems with the CM? (It could be none at all if you rely on email and a web portal)
  • 24 Hour Service: Does your CM provide an around-the-clock service?
  • Hotline / Help desk: What happens when something goes wrong? Does the CM provide a strong support function?
  • Intraday Margin Coverage: How does an intraday margin call get funded? Does your CM provide options for this?
  • Size of Firm: How big (capital, people, geography) is the CM?
  • Regulatory reporting: Can the CM also handle the reporting requirements in the US and EU for you?
  • Omnibus Account: Does your CM offer an Omnibus account (all will so not really an important criteria)
  • Individual Account: Does your CM offer an Individual Segregated account? This is becoming a bigger implementation challenge in the EU
  • Short term financing: Similar to the Intraday Margin Call point above – what ways can your CM provide funding for margin?
  • Established Relationship: Do you already have an operational or trading relationship with a CM?

There may be other key issues for you (let me know in the comments), but given this lengthy list, how do you make sense of your selection criteria? Here's one approach:

  • Build a matrix of the criteria (see below)
  • Compare each one with each other – pick the relative importance of each pair of criteria
  • Count the number of times you pick each of the criteria
  • Voila – a weighted list of criteria against which you can score each potential CM

Selection Matrix

matrix Click to enlarge

 

In the table, an example is shown where I have compared the two criteria "Individual Segregated Account (IND)" against "Net Settlement (NET)" and decided that being provided with an Individual Segregated Account is the more important criteria of the two. The matrix ensures a complete comparison between every pair of criteria

Weighted outcome

Given the above table, you need to transform this into an outcome.

  • Count the number of times each three word code occurs in the matrix
  • Count the total number of three word cells (105)
  • Divide one by the other to get the percentage of times that criteria was chosen as the most important

You end up with a handy weighted score for each criteria, which can then use to score RFP responses from your prospective Clearing Member. Of course the one criteria I didn't show was the "Wine and Dine" approach to marketing ;-) Bill.


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