Delta-One-Products: Synthetic Route Has Real Appeal
As demand grows, a wider range of prime brokers are emphasising the offering. HSBC, for example, is specialising in building global exposures, increasingly to frontier markets, which leverages their unique local presence in many markets. “In certain markets, clients can’t get access on a cash basis, only on a derivative basis,” says Paul Hamill, global head of prime services at HSBC. “Delta one traders have that capability and often have deeper local market knowledge.”
For now, synthetic products still must compete with traditional listed derivatives, such as options or futures. Exchange traded funds that replicate indices or attempt to deliver specific exposures, such as leveraged or inverse returns, are also major competitors.
In some instances, the over-the-counter product is cheaper. “If we can create a synthetic exposure efficiently, it’s often much cheaper and more liquid,” says Keith Skeoch, chief executive of Standard Life Investments, who says the manager’s Global Absolute Return Strategies fund generally prefers derivative positions to cash ones.
However, listed products, with their more readily understood risks, are still the default tool. According to Greenwich, about three-quarters of equity options trading is done via listed products rather than via over-the-counter trades. At present, only clients of banks with which they have documented agreements about collateral and credit risk can do swap trades with the bank.
That may be changing somewhat, as G20 countries have struck an agreement to push more derivatives trades into exchanges and central clearinghouses. The advent of electronic platforms is also streamlining the creation and clearing of swaps as a way to dampen the risk of a broadening client base and the complications of new regulations.
Some banks, such as Barclays and Deutsche Bank, have created tech-nology to carry out necessary pre-trade risk checks in fractions of a second.
“It really comes down to the institution and their internal technology step-up,” says Andrew Jamieson, head of Emea equity finance at JPMorgan. “We have traditionally had more of a cash prime brokerage bias, but have invested heavily in technology and are definitely ramping up synthetically.”