At the root of the price increases is Basel III, the new set of global banking regulations that has been hammered out by the Bank of International Settlements and which is due for phased implementation by 2019.
Indeed, hedge funds are at the sharp end of the changes simply because they are the ones that trade the most and in the biggest volumes. A survey by the UK’s Financial Services Authority in February, covering hedge funds managing a third of the industry’s $2 trillion in assets, found managers had in the last six months of 2011 traded $8 trillion in equities, $6 trillion in Group of 10 government bonds and $9 trillion in currencies.
Increased costs, which break down into fees for trades themselves and the amount of collateral hedge funds must stump up to use leverage, could hugely constrain such volumes. Hedge funds are at the forefront of regulators’ attempts to control risk-taking and bubbles in global markets.
The LCR regulations, which will be the first to hit home, stipulate that banks must secure their lending to hedge funds by borrowing with a minimum 30-day term. In other words, even if a prime broker lends to a hedge fund on a rolling overnight basis, they will have to secure such lending by themselves borrowing on a minimum 30-day basis.
The NSFR provisions are meanwhile potentially even more wide-ranging, say bankers. They require that beyond the 30-day LCR provision, banks must hold a minimum in capital equivalent to 50 per cent of the value of the lent security for one year. The provision increases depending on the complexity of the security involved. Asset-backed bonds, such as mortgage-backed securities, or more complex fixed-income products such as convertibles, will require even higher capital provisions to be held for a year.
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