Julian Eyre | published on 2nd February 2018

How will your firm be incentivised?

More so than ever, Investment Banks are looking to unlock value on all the assets that reside on their balance sheet but, are constrained by traders not allowing certain assets to be used as current transfer pricing mechanisms are not compensating them adequately.

Historically, transfer pricing models were created to help with internal asset utilisation, but the inflexible nature of transfer pricing is considered no longer fit for purpose to solve for this challenge. We at The Field Effect have developed the next generation, multi-dimensional incentives model enticing more asset owners to have assets rehypothecated by providing more flexibility as to how the asset owner is compensated.

The original transfer pricing model was akin to a hire fee, whereby the asset owner was paid a daily fee for the use of the securities. However, in many situations the daily fee was not sufficient to attract the asset owner to release the asset for use. The new incentives model helps address these challenges by providing a wider variety of benefits for the asset owner, some of which include:

• Balance sheet relief
• RWA relief
• NSFR/ LCR liquidity

Not only does the much-improved incentives model motivate asset owners to have their inventory rehypothecated, but also influences key business area funding decisions which will ultimately dictate the appropriate charges and credits that will be applied to the asset. The charge will be derived by the asset quality along with the value achieved by the transaction type, be it an upgrade trade, repo transaction or for collateral usage to name a few. The value generated economics will be passed back to the asset owner via an agreed profit sharing approach.

As a consequence of adopting the next generation incentives model more asset owners are providing more of their assets to be used, therefore a highly liquid internal marketplace is inherently created for collateral. As asset owners release more of their assets for rehypothecation, this translates into benefits for the firm including balance sheet reduction, increased supply of LCR/NSFR liquidity and ultimately increased profitability which in today’s market is nivana.

With 2018 being the year for firms to be 100% compliant with LCR through its phased approach along with the new introduction of NSFR, now is the time to consider how your regulatory obligations can inform your internal opportunities.

Contact us here to see how we can help you turn your challenges of today into opportunities for tomorrow.