TriOptima has developed and tested triBalance, a new service for the mitigation of risk concentration that emerges because credit exposure of cleared trades can no longer be netted against bilateral trades across different asset classes that are ineligible for clearing.
triBalance reduces sources of contagion risk in both cleared and bilateral counterparty relationships by rebalancing counterparty credit risk exposure driven by future market movements.
In collaboration with nine of the most active over-the-counter derivative dealers, pilot tests of the new service reduced counterparty risk exposure in the participants’ portfolios of cleared and uncleared trades by 33%. TriOptima says triBalance generated an aggregated reduction of $2.7 billion in potential future exposure across the participants, assuming a 10 basis point move in interest rates. In periods of extreme market volatility, the potential risk reduction is even greater.
Regular participation in triBalance will create a more risk balanced environment that enables a smoother management process for all market participants including central clearing counterparties in the event of a default, the company says.
Peter Weibel, chief executive officer of triRalance, says, “triBalance is an important post trade service that addresses imbalances in counterparty relationships. It reduces counterparty risk for individual institutions as well as CCPs and thus creates greater stability in the global financial system.
“With regular triBalance cycles, CCPs and their clearing members will be better positioned to weather the impact of another crisis by proactively managing counterparty risk exposure, leading to a reduction of systemic risk, and also to a more efficient allocation of capital and collateral. The pilot results have been very positive, and we look forward to live cycles in the second quarter,” Weibel says.
The service operates by using TriOptima’s multilateral optimisation engine to calculate an optimal counterparty risk-reducing set of rebalancing trades for participants to execute in order to offset existing risk versus CCPs and bilateral counterparties simultaneously.
“Reducing risk exposure to bilateral counterparties and CCPs will reduce initial margin requirements, regulatory capital, margin volatility, CVA hedging costs and close out risk while contributing to a decrease in systemic risk and a simplification of the CCP’s default management process,” TriOptima says. “triBalance cycles will be held periodically to reduce and maintain a low potential future exposure to market movements.”
Discussions among regulators have drawn attention to a potential collateral squeeze as collateral demands are predicted to increase as a result of initial margin requirements for CCPs, new margin rules for uncleared trades and the Basel III liquidity coverage ratios.
“triBalance’s reductions in potential future exposure enable market participants to meet those demands more efficiently. They also mitigate over or under collateralisation and thus relieve stress in periods of volatility,” TriOptima says.