Cassini says volatility and liquidity management to define 2024

Rick Steves

“While 2023 has seen relative stability in terms of volatility, it has posed significant challenges to global economic growth, primarily due to the prevailing high inflation and elevated interest rates. For our clients, this has translated into not only higher margin requirements but also an escalated cost associated with securing their collateral. It is evident that this surge in costs resulting from the elevated interest rates is, at the very least, a medium-term trend, necessitating proactive management by buy-side firms to safeguard portfolio performance from any potential drag.”

In 2023, Cassini observed a shift in client focus toward collateral cost management and strategic asset allocation for collateral utilization in derivatives trading.

This trend is driven by the high-interest rate environment, impacting asset portfolio evaluations and third-party collateral management fees. Cassini predicts this focus will continue into 2024.

Cassini expects sustained volatility in inflation and interest rate markets throughout 2024, regardless of potential rate changes. This outlook stems from the current global economic climate, marked by high inflation and elevated interest rates.

Higher margin requirements and cost of collateral

Liam Huxley, Founder and CEO of Cassini, noted the stability in volatility but acknowledges the challenges to global economic growth from high inflation and interest rates. These factors have led to increased margin requirements and higher costs for securing collateral. Huxley suggests this trend is likely to persist, requiring proactive management by buy-side firms.

“While 2023 has seen relative stability in terms of volatility, it has posed significant challenges to global economic growth, primarily due to the prevailing high inflation and elevated interest rates. For our clients, this has translated into not only higher margin requirements but also an escalated cost associated with securing their collateral. It is evident that this surge in costs resulting from the elevated interest rates is, at the very least, a medium-term trend, necessitating proactive management by buy-side firms to safeguard portfolio performance from any potential drag.”

Regulatory focus on margin requirements, mandatory clearing, stress testing, and margin optimization is expected to continue. Huxley references specific regulatory actions, such as the Bank of England’s stress testing directives post-LDI crises, enhancements in cross-margining offerings by DTCC and CME, and the SEC’s proposal for centralized clearing of repo. These indicate ongoing industry attention to margin-related issues.

The increased funding pressures have highlighted the costs associated with derivatives trading. This has brought to the fore the importance of efficient margin and collateral management throughout the trade lifecycle. Consequently, organizations are likely to increasingly invest in technology solutions that offer cost savings in margin and collateral management, thus improving liquidity management capabilities.

From a wider market perspective, regulatory statements about the importance of centralized and transparent margin requirements, mandatory clearing, stress testing of margin, and the exploration of margin optimization through cross-margin arrangements are set to persist.

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