We review 3 relevant themes for equities and cryptocurrencies for asset managers in 2022
The maturity of cryptocurrencies has led to increased adoption of crypto products, such as centralized clearing and regulated crypto derivatives.
As sustainable investing grows, index-based derivatives will be key to hedge against environmental, social and governance (ESG) factors.
2021 is an important year for the world of financial markets. We are witnessing a retail revolution, increased enthusiasm for cryptocurrencies, and deep roots in financial institutions in terms of ESG as we move into 2022. I think these are exciting trends that are likely to be a source of interest for many equity investors and Alternative market minds.
As the sixth phase of the Unnet Margin Rule (UMR) approaches, in September 2022, another major theme will focus on a greater proportion of buyers entering the UMR range and the requirement for more initial margin deposits on various trades instruments, including unliquidated equity derivatives.
Diversification through encryption
Looking ahead to 2022, clients no longer ask “Should I invest in cryptocurrencies?” Now they want to know: “How much should I invest in cryptocurrencies?” Especially against the backdrop of rising inflation, clients want to add to their portfolios Cryptocurrency exposure to diversify uncorrelated returns.
Clients’ growing understanding of cryptocurrencies and how to add them to their portfolios has led to an increasing adoption of specifically regulated and centrally cleared cryptocurrency products and derivatives. Being able to enter a new and still relatively nascent market in a trusted and familiar way through regulated futures and options enables institutional clients to start investing and trading assets such as Bitcoin and Ethereum. This is undoubtedly the trend for 2022.
Continued innovation in appropriately sized new micro-contracts, as well as larger cryptocurrency futures, will also enable risk-savvy institutional investors to deploy traditional capitalization and investment strategies while continuing to expand the participant base. Self-employed to market.
Derivatives and ESG
The rise of ESG factors in the financial sector is encouraging. Moving from an academic consideration to an element of many investment decisions, ESG standards are increasingly influencing equity, bond and commodity markets, as evidenced by the introduction of carbon offset products and higher index evaluations. As sustainable investing will grow in 2022, so will the demand for risk management solutions tailored specifically to ESG standards.
Risk management should be simple and cheap. This is achieved through derivatives based on ESG versions of existing benchmarks, such as S&P 500 ESG Index futures, enabling companies to manage specific risks associated with ESG factors in an efficient and liquid manner. S&P 500 ESG futures allow funds to achieve targeted allocations in a more cash-efficient manner than investing directly in the underlying stock, which can free up more money for sustainable investing.
The use of index derivatives with reliable calculation methods is essential to effectively hedge all forms of ESG risk. One such example is the S&P Dow Jones Indices S&P 500 ESG Index, which is considered compliant with EU Regulation 8 for Sustainable Financial Disclosure Regulation (SFDR).
Ring Main Unit Stage 6
A key regulation that will attract more attention from the buying community in 2022 is the UMR. By lowering the Average Notional Amount (AANA) threshold from €50 billion in Phase 5 to €8 billion in Phase 6, from September 2022, a higher percentage of funds will be put into use, which will need to constitute an unliquidated Initial margin derivatives traded over-the-counter. ISDA estimates that Phase 6 of the UMR will recruit 775 counterparts, while Phase 5 will recruit 314 counterparties.
While the focus so far has been on foreign exchange and interest rate instruments, it is understandable that equity swaps have received some attention despite the fact that OTC equities have higher initial spreads than other asset classes. This is likely to change throughout 2022 as margin efficiency becomes increasingly important to market participants.
As such, the margin efficiency offered by trading and clearing equity futures may receive more attention so that participants can minimize returns and fees due to the increased initial margin requirements required for equity swaps. Uncompensated shares under UMR.
An important factor to keep in mind is that all three key themes are underpinned by an ongoing challenge to the buy-side, namely rising industry costs. Going forward, using listed derivatives to manage risk and improve returns will be more challenging as companies consider applying crypto and ESG products to their portfolios, while adhering to regulatory changes and working to improve profitability..