Funding, fees and charges are a core component of the desk's P&L. In this chapter we will identify the funding requirements of the desk and explore the related P&L components. We will also review the most common types of fees and charges and understand how they are reported in the P&L.
Funding
Drivers of Funding
The desk's portfolio has an array of financial instruments, all of which generate cash flows during their life cycle. Excess funds will be lent to generate income whilst deficits will require the desk to borrow funds to meet the shortfall. The typical drivers of funding are illustrated in Figure 11.1 and examples are provided in Table 11.1.
Table 11.1 Funding drivers by financial instrument
Financialinstrument
Principalexchanges
Coupons
Dividends
Premium
CSA
VariationMargin andInitial Margin
Bonds and discount securities
X
X
Repo and Reverse repo
X
X
FX Derivatives (FX Spot, Forward, Swap)
X
X
Options
X
X
Interest rate swaps
X
X
Cross currency swap
X
X
X
Credit default swap
X
X
Stocks
X
X
Futures and exchange traded options
X
Derivatives settling through a central clearing counterparty (CCP)
Note: CSA denotes a credit support annex and is relevant for the funding of OTC derivatives
How a Desk Funds Itself
The desk is funded ...
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