The rise of thematic, ESG and climate investing has created demand from asset managers to trade tailorable baskets of equities in order to gain specific exposures.
That’s according to a study from Acuiti, Solving the Investment Trilemma, which was commissioned by Nasdaq, found that asset managers were reducing over-the-counter (OTC) exposures following post-crisis reforms such as Uncleared Margin Rules.
The Trilemma in question refers to the fact investors have been unable to find products offering capital and margin efficiency, low trading costs and customisability.
This vacuum has seen asset managers seek listed alternatives that provide the customisability of OTC markets but without the associated cost and complexity of managing ISDA agreements and trading OTC.
The report found that ETF markets and currently available listed products go some way to meeting the demand but that there remained a significant gap in the market for a customisable listed product.
The report also found that asset managers are seeking to further reduce OTC exposures over the next three years which provides an opportunity for the sell-side to promote listed products that solve the requirements of their clients.
Will Mitting, founder of Acuiti, said: “OTC markets have traditionally played a key role for the buy-side in enabling them to build complex and tailored products to meet the specific requirements of their portfolios.”
“However, the rising costs and complexity associated with OTC derivatives has forced firms to look for listed alternatives. Our study suggests that Custom Basket Forwards (CBFs) can solve the investment trilemma for firms offering a margin efficient, customisable product with low trading costs,” Mitting added.
“As asset managers continue to innovate and meet investor demands for thematic, ESG and climate investments, the sell-side is well placed to offer access to listed products that can serve these requirements,” says Mitting.
The Acuiti study found that banks see potential in CBFs to engage new clients and offer existing clients new products as well as bringing greater capital efficiency to the market.
Alessandro Romani, vice president, head of European derivatives at Nasdaq, said: “With the launch of Custom Basket Forwards, Nasdaq is well positioned to provide Asset managers and sell-side firms with an alternative solution to OTC equity swaps, based on a listed and CCP cleared derivatives contract.”
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