What products does CAPITALAB support and in which currencies?
Our first product is Swaptioniser, a compression service for all major Interest Rate and FX derivative products. For Rates this includes Swaptions, Caps and Floors, Swaps, FRAs, OIS, Basis Swaps and Cross Currency Swaps – spanning both cleared central counterparties (CCPs) and non-cleared (bilateral) counterparties. For FX this includes FX Options, FX Swaps, FX Forwards and Cross Currency Swaps. Our currency coverage spans all the majors and we are expanding in the APAC and LATAM regions. Additionally, we operate an Initial Margin Optimisation service: a counterparty risk-reduction offering across bilateral and cleared counterparty risk.
What regulations across the globe mandate Portfolio Compression?
Regulation to mitigate systemic risk and improve transparency in the trading of derivatives instruments is being implemented on a global scale, most notably in the U.S. with Dodd-Frank, in Europe through EMIR and MiFIR/MiFID II, in Japan through the Financial Instruments and Exchange Act of Japan and in Singapore with the Securities and Futures Act. These mandates call for a number of initiatives related to reporting, clearing, and the use of electronic trading platforms along with capital and collateral requirements. Portfolio Compression and Margin Optimisation falls under a number of these provisions both in terms of electronic processing and as a tool to help reduce capital required under the provisions of these regulations.
How does portfolio compression reduce risk, capital costs and ease processing burdens for market participants?
By reducing the number of tickets, the portfolio is simplified. The fewer live trades there are in the book, the fewer expiries and cash flows there are for traders and operations to manage. By reducing the gross notional outstanding of a portfolio, portfolio compression also improves the Basel III Leverage Ratio (via a reduction of the “add-on” exposure), resulting in less capital required and greater liquidity.
What is Portfolio Compression and why is it important?
Portfolio Compression involves reducing the notional and number of contracts in a derivatives portfolio, without changing the portfolio’s market risk. This market process gained additional traction after the G-20 in 2009 decided to regulate the derivatives markets, and mandates such as Dodd-Frank in the U.S. and EMIR in Europe require or strongly recommend market participants periodically apply portfolio compression on the outstanding positions they hold in their books. In addition the Basel III Leverage Ratio, designed as part of these new regulations, states that banks should set aside capital roughly in proportion to the gross notional outstanding of their derivatives holdings. Because compression reduces the gross notional outstanding for a derivatives portfolio, it minimises capital requirements and hence preserves liquidity and cost efficiency for banks.
For which clients do you provide services?
The services are provided to clients globally from BGC Brokers LP’s London and Singapore offices and also Aurel BGC SAS in Paris.
What are the types of clients that can use your service?
We partner with a wide range of market participants across the globe including major banks, large derivatives dealers, hedge fund managers along with Central Counterparties and Settlement services.
What are the unique characteristics of the Swaptioniser service?
Swaptioniser is the first multilateral compression service that supports Interest Rate Options. While applied to swaptions, caps and floors our proprietary technology is instrument-independent and is applied to other products and asset classes.
WHAT IS CAPITALAB’S APPROACH TOWARDS INITIAL MARGIN OPTIMISATION?
Non-cleared initial margin rules are a massive burden on the industry, which causes $2-10tn of additional initial margin in total being posted according to ISDA. As a precursor of compressing non-cleared IRO / FXO Multilateral portfolios, Capitalab undertook steps to provide its Clients with a solution, where unwinding of a small number of existing trades results in simultaneous Initial Margin, Counterparty Risk and Leverage Exposure reduction. Thanks to our use of BGC Brokers LP’s existing Straight Through Processing, our optimisation service runs smoothly with minimal effort needed when processing IRO unwinds.
HOW OFTEN DOES CAPITALAB PERFORM PORTFOLIO COMPRESSION AND INITIAL MARGIN OPTIMISATION?
Typically once a month for multilateral compression runs and twice a month for Initial Margin Optimisation. Capitalab also organises bilateral compression between clients as requested by them from time to time.
Capitalab will continue to provide services as a division of the UK FCA registered BGC Brokers LP, but where required we also have the flexibility to provide our services under the same terms from our EU based Capitalab, part of Aurel BGC SAS the BGC Partners Group’s EU hub.
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