Smart Clearing of NDFs via Quantile
Sending trades into a CCP can be driven by the availability of your counterparty and the product, but assuming you have both and choose a CCP, how should you route the trades? Quantile Technologies have developed a 'smart routing' service intended to make clearing NDFs as cost effective as possible. CME and LCH both offer clearing of FX products including NDFs which gives direct members a choice of platforms as the destination for new NDF trades. Quantile is able to offer a service across both CCPs, which in the long run will reduce risk for all parties including the CCPs and therefore reduce systemic risk.
Users of the Quantile optimisation service have novated $1.2bn of NDF trades into CME by analysing the netting sets between the banks and within the CCP. Quantile have 15 of the largest dealers using their optimisation service with both the CME and LCH FX clearing platforms as destinations. Why does this matter? Simple, it's margin costs. If you can clear a trade which offsets risk and reduces IM rather than increases it, you stand to save money and reduce portfolio risk.
Quantile's margin optimisation service enables dealers to benefit from the different product offerings and netting sets available at the leading global clearinghouses. Adding CME Group to Quantile's optimisation run significantly reduces clients' margin obligations, utilising multiple Central Counterparties (CCPs).
"By adding CME Group to our optimisation service we are able to amplify the risk reduction opportunities across our network, generating increased capital and margin benefits for all of our clients" said Andrew Williams, CEO of Quantile. "The significant reduction in risk, and margin savings from this cycle are clear examples of the efficiencies that can be generated by taking part in these multi-dealer and multi- CCP processes.”
"As an active member of the initial optimisation runs, Standard Chartered has always sought to take advantage of every opportunity that will reduce the use of scarce resources. Since the commencement of the optimisation cycles we have seen significant savings in our overall margin requirements and by widening the number of participants, we see potential for increasing this benefit further” said Matt Turner, Director, XVA Trading at Standard Chartered.
“Including multiple CCPs in a single optimisation run gives market participants confidence that, regardless of where they choose to execute and clear trades, their risk will be optimised via our post trade service” said Varqa Abyaneh, Chief Product Officer of Quantile. “This helps mitigate concerns surrounding market fragmentation and the formation of independent liquidity pools.”