Securities Finance Client P&L DEMYSTIFIED

Every trader and business head would agree that the most important measure of one’s success is P&L. Business profitability is also the main factor for the trading desk’s bottom line and has direct implications on individuals’ compensation and viability of the business as a whole.

Thankfully, if you are a part of the Securities Finance business, it is very easy to calculate the P&L. After all, Securities Lending and Repo transactions are annuity based with a basic formula that calculates the profit and loss per transaction.

It is easy to calculate the revenue by an individual instrument or a trading book/profit center by simply aggregating individual transactions’ revenue by one of these fields, but the problem starts when you would like to see your P&L per client.

If you will use the same aggregation method as above per client, most likely you will end up with these results:

• Clients that you predominantly borrow/reverse assets from will have a negative P&L

• Clients that you predominantly lend/repo assets to will have a positive P&L

• Short sale coverage for internal desks will be unnecessarily included in your calculations

• Financing trades will be thrown into the mix, especially for those clients where you have both financing and matched book transactions

• Direct funding trades will put the calculations off

• Some clients that may be strategic for your organization, will show very low revenue

• And the list goes on …

By incorporating the following elements (this list contains just a few), you can come up with an ideal client P&L report:

• Robust, properly maintained client/parent accounts’ relationship

• Client ranking in reference to the importance to your trading desk or your organization

• Ranking adjustment algorithm that will ensure that your “important” clients with low revenue will get the proportional P&L recognition

• Identification of those clients that require no adjustments, for instance, those with pure financing transactions

• Total balances per client regardless of the weighted average rate/fee

• Total number of transactions per client to adjust for transactional cost

• The quality of outstanding assets to properly adjust and come up with RWA (Risk Weighted Assets) coefficient

• Credit limit utilization and credit limit allocation per client to adjust for internal regulatory cost

• Proper identification of internal funding trades and proper allocation of their cost to external clients

• Regulatory charges adjustments

• Adjustments for pre-borrows and locates and proper allocation to external clients

Some of these elements could be optional, some mandatory, but in a current regulatory environment, the more elements you use, the better and more accurate your report will be.

How do you put all of these elements together? Contact us for an in-depth analysis relevant to your organization.

#securitiesfinance #PL