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Credit needs transparency to correct mispricing: Marex Spectron

Keywords: Tags  Marex Spectron, Simon Van Den Born, credit, EMIR, Andrea Hotter

NEW YORK — A more transparent evaluation of credit is needed to fix its incorrect pricing in the market, according to the global head of metals at Marex Spectron.

Simon Van Den Born said brokers often lump credit into the overall cost of doing business instead of creating a cost-plus model, giving clients a false view of its actual value.

"We believe that credit has continually been mispriced by the marketplace and we prefer to offer a far more transparent pricing of credit rather than trying to build the cost into transactions," he told AMM.

"Pretending that credit is free is incorrect and all it leads to is others finding different ways to extract value from the transaction to pay for it more opaquely," Van Den Born added.

Marex Spectron breaks down the cost of credit to its clients in its transactions, a change that some clients have appreciated and others have taken time to accept, he said.

"We’ve given clients a precise credit cost assessment over the last year. If a client can push credit costs downstream, it’ll do it; if a client thinks credit is a cost then like any other cost, it will automatically assume it doesn’t want to pay it. But hopefully over time, the client will get a more accurately priced product rather than an opaquely priced product," he said.

Financial firms like Marex Spectron are gearing up for the introduction of European Market Infrastructure Regulation (EMIR), which seeks to address concerns about a lack of transparency in the over-the-counter (OTC) derivatives markets.

Under EMIR, nonsegregated client contracts are prohibited, meaning customer-cleared positions and related margin and collateral must be held in a separate client account, rather than in a firm’s house account.

There is widespread concern that increased collateral is likely to be required from each client as a result.

Van Den Born said EMIR could cause a shakeout, but credit will remain a prevalent sales tool.

"The belief that brokers will suffer under EMIR because they’ll be unable to offer credit is overplayed. If credit isn’t going to be one of our sales tools, I don’t think that’s necessarily going to take brokers out the market completely," he said.

"There are clients that operate with entities like Marex Spectron that do not operate with certain banks. Our cost structure has a different threshold—we can deal with certain entities of a certain margin in a way that makes it effective to us but doesn’t necessarily make it effective to the competition," Van Den Born added.

Van Den Born said Marex Spectron’s owner JRJ Group has made it a priority to ensure the company knows exactly where its costs lie and to structure its business accordingly.

"If you don’t know what left hand, right hand are doing, you’re going to find the current environment very challenging and very difficult to exist in," he said.

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