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
"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.
"Weve given clients a
precise credit cost assessment over the last year. If a client
can push credit costs downstream, itll do it; if a client
thinks credit is a cost then like any other cost, it will
automatically assume it doesnt want to pay it. But
hopefully over time, the client will get a more accurately
priced product rather than an opaquely priced product," he
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 firms 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
"The belief that brokers will
suffer under EMIR because theyll be unable to offer
credit is overplayed. If credit isnt going to be one of
our sales tools, I dont think thats 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
thresholdwe can deal with certain entities of a certain
margin in a way that makes it effective to us but doesnt
necessarily make it effective to the competition," Van Den Born
Van Den Born said Marex
Spectrons 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 dont know what left hand, right hand are
doing, youre going to find the current environment very
challenging and very difficult to exist in," he said.