Articles tagged by compression
After a number of years having to take reactionary measures in
response to new regulatory requirements, panellists at Profit & Loss’ Forex Network New York conference expressed
enthusiasm for a new wave of innovation that has the potential to re-shape FX
Lmrkts, a compression provider which recently
facilitated the first multilateral FX compression designed to lower
counterparty exposures and consolidate cash flows, has agreed a strategic partnership
with Tradition to handle execution and compression processing for FX forwards.
A limited release ...
TriOptima announces that 11 CME Group IRS clearing members
eliminated 12.5 trillion MXN ($664 billion) notional outstanding in the first
triReduce multilateral compression cycle for cleared Mexican peso (MXN)
interest rate swaps (IRS).
Over 35% of the cleared MXN notional principal outstanding
in CME ...
Just about 10 months ago the deal was announced to sell Icap’s voice business to Tullett Prebon and at that time, in this column, I suggested that a consequence of that deal would be an easier path for anyone looking to buy Icap’s electronic business, subsequently revealed to be named Nex.
Obviously I cited an exchange as the most likely buyer and it seems, if the headlines of last week are anything to go by, that the pieces are being moved into place. Moving pieces is, however, very different to an actual deal – what are the chances of that?
As leverage requirements make FX exposures a bigger pain point for the banks, many are looking towards compression services to solve for this. Galen Stops looks at how these services work and what they could mean for the industry.
One of the responses by global regulatory bodies to the 2008 financial crisis was to require banks to hold more capital against their financial exposures, creating a bigger buffer to protect them against adverse market conditions.
Capital constraints have widely been cited as a reason for declining activity in some markets and liquidity events in other, therefore it is not surprising that compression services, whereby offsetting trades are netted off against one another to reduce the notional amount on banks’ balance sheets, have found favour amongst banks and major dealers.
The Bank for International Settlements (BIS) has released its latest semi-annual survey of OTC derivative markets which highlights the growing impact of central clearing on interest rate derivative markets.
The publication presents the combined results of two complementary BIS surveys on positions in OTC derivatives markets: the semi-annual survey of derivatives dealers in 13 jurisdictions, and the Triennial Central Bank Survey of dealers in an additional 33 jurisdictions. The surveys took place at end-June 2016. A companion survey on turnover in foreign exchange and OTC interest rate derivatives markets took place in April 2016, and the results were published in September.
Capitalab, an entity within BGC Partners, has launched a multilateral portfolio compression service for FX options, as well as for interest rate caps and floors.
Since June 2016, five FX options compression runs have been executed, in USD/JPY and EUR/USD, with the participation of respectively five and seven FX options dealers.
In the last three interest rate options compression runs organised by Capitalab, participants have also included caps and floors, together with swaptions. Caps and floors – options on Libor and Euribor forward rates - are known to be capital intensive, because of their large notionals.
LCH is seeing the benefit of the push towards central clearing of derivatives, the clearinghouse announcing its SwapClear service cleared record volumes of interest rate derivatives in 2016.
LCH says it processed over $665 trillion in notional over the course of the year, representing an annual increase of 25%. “Both members and their clients increased their flows through LCH, with the buy side clearing a record $139 trillion in notional at SwapClear,” the firm says. “These volumes were driven by customers clearing new products, such as inflation swaps, as well the continuing effects of regulatory change.”
Inter-dealer broker Tradition says it has delivered an initial margin optimisation in FX, after extending its partnership with compression and analytics provider LMRKTS.
The two firms announced a strategic partnership in 2016 to handle execution and compression processing for G10 FX forwards and they say in February they completed a Standard Initial Margin Model optimisation for NDFs with a group of Tradition’s clients.
Tradition says it used its existing infrastructure and connectivity, in combination with LMRKTS’s analytics, to provide the end-to-end service for participants.
Compression service provider, LMRKTS (Lmrkts), has become the first firm to sign up to Cobalt DL’s BlueSky service, the shared ledger component of Cobalt’s platform.
The Cobalt BlueSky service is a secure repository of unique shared FX contracts and the staging area for lifecycle events, risk reduction and preparation of trades for settlement finality. It is designed to enable third party technology providers to facilitate and develop their own applications based on access to the database of reconciled transaction data created by the Cobalt network.
TriOptima has included client cleared trades in a triReduce Mexican peso compression cycle in CME Clearing for the first time.
CME Clearing and TriOptima have offered 15 compression cycles in five currencies since they started collaborating in 2016, compressing a total of $26.1 trillion in notional principal, of which $1.2 trillion is in MXN. There were 17 participants in this cycle.
Commenting on the news, Jacaranda Nava, head of derivatives trading at Banorte, says: “We are pleased to be the first Mexican bank to participate in a cleared Mexican peso compression cycle. Since we are a major participant in the derivatives market, this compression process simplifies the management of our swaps portfolio and optimises our capital requirements.”
As buy-side workflows are becoming complex, these firms are looking for ways to simplify how they view and manage them, claims Basu Choudhury, business intelligence, Nex Traiana.
He says that, whereas in the past buy side firms used to probably have only one prime broker (PB), today they might have four or five prime brokers, or even have bilateral relationships. Further, when they execute they might do so via an anonymous venues or they might trade against another buy side firm that is using a prime broker.
“So what we’re seeing and hearing is that they want a single panel where they can see their PB relationships and bilateral, and even clearing at some point within one dashboard, one platform, where they can manage the matching, [confirmations] and settlements,” he says.
International Finance Corporation (IFC), a member of the World Bank Group, has made an equity investment in compression service provider, LMRKTS (Lmrkts).
IFC joins lead investor Motive Partners, a private investment firm focusing on technology-enabled companies within the financial services industry, in this investment round.
Founded in 2012, Lmrkts provides a compression service designed to enable commercial and investment banks to reduce exposure to each other thereby minimising counterparty risk and leverage costs.
The company balances participants' counterparty limits and their risk management objectives with a structured methodology that aims to deliver mutually beneficial results. After years of testing, Lmrkts launched in late 2016, and has compressed over US$2 trillion of notional equivalent in foreign exchange derivatives.
NEX Optimisation, announced today that participants in its triReduce compression service have eliminated over $1 quadrillion in OTC derivative notional principal since its introduction in 2003.
TriReduce a multilateral risk-constrained compression service that offers compression for cleared and non-cleared interest rate swaps in 28 currencies, cross currency swaps, inflation swaps, credit default swaps, FX forward, and commodity swaps.
Eliminating unnecessary swap inventory can help improve credit risk and capital management, reduces operational costs and risk, improves leverage ratios, and reduces systemic risk.
What are the biggest challenges still facing FXPBs today and how can they be overcome? Galen Stops takes a look.
There’s no getting around the fact that regulation has changed the economics of the FX prime brokerage (FXPB)
business, and not for the better.
“You can classify PB costs into three basic categories – technology, human resources and direct transactional costs,” says Sanjay Madgavkar, global head of FXPB at Citi.
The first two of these are fixed costs that an FXPB has to pay, but the new regulations under Basel III have made it more expensive for banks to provide FXPB services to certain clients, meaning the overall profitability of some portfolios has fundamentally declined.
So we’ve just published our Q3 edition of Profit & Loss magazine, which includes our prime services special report, and I wanted to share some thoughts about one segment of it.
When I first started the report I was very negative on the prospects for FX prime brokers, over the eighteen months or so I’d heard so many complaints about credit constraints, about offboarding – I don’t think that was even a phrase that I’d heard prior to SNB – and the general retrenchment of FXPBs.
Now obviously SNB was a catalyst for a lot of these issues, but really it just exacerbated a trend that already existed and this was caused by the introduction of new regulations that made it more expensive for banks to offer FXPB services to a lot of clients.
CLS and NEX Group have announced that they are extending the triReduce CLS FX service to third parties. These institutions will participate in the same compression cycles as CLS settlement members.
Financial institutions and multinational corporations that settle in CLS Settlement through a settlement member are now able to join the compression service, benefiting from reduced counterparty exposures.
NEX’s triReduce and CLS pioneered the triReduce CLS FX service to provide risk mitigation services for the global FX market for non-cleared OTC derivative trades. The service combines CLS’s infrastructure and market connectivity with triReduce’s compression expertise.
LCH says that its ForexClear members have reduced their notional outstanding by $4.5 billion through the use of the service’s compression solution. Citi and Standard Chartered Bank are among the first participants to actively compress their trades at ForexClear.
Compression is the process by which clearing members and their clients can eliminate offsetting trades to reduce notional outstanding and the number of line items in a portfolio. Capital requirements such as those introduced under the Basel III leverage ratio have incentivised banks to reduce notional outstanding.
For the first time, trades registered in LCH’s SwapAgent service were successfully compressed in TriOptima’s multilateral USD/EUR cross-currency swap compression cycle. Using its triReduce compression service, €4.5 billion in notional of trades registered in SwapAgent were compressed. During the run, SwapAgent and non-SwapAgent trades were blended together to achieve better benefits from the compression.Compression is the process by which members can eliminate offsetting trades to reduce notional outstanding and the number of line items in a portfolio. Capital requirements such as those introduced under the Basel III leverage ratio have incentivised banks to reduce notional outstanding.
TriOptima, a provider of multilateral compression services for OTC markets, set a new record for its triReduce portfolio compression service in 2018, having compressed $250 trillion gross notional value of trades at LCH SwapClear.The firm says this record, which represents an annual increase of 31% in terms of notional value, was driven by a combination of increased participation of both dealers and their clients, increased trade submission to triReduce cycles and a wider adoption of the Trade Revision methodology, which improves compression efficiency by up to 50% by allowing a wider range of trade economics to be changed.“We are proud that another record compression year continues to help the industry achieve important capital and operational cost reductions,” says Peter Weibel, co-CEO at TriOptima.