COMPREHENSIVE PORTFOLIO COMPRESSION
Portfolio compression has become key to successful counterparty risk management, both in terms of reducing overall risk exposure and in facilitating overall margin savings.
Capitalab’s Swaptioniser® is an industry-leading solution that can compress a client’s single and multi-period exposures across swap and option products.
FUNCTIONALITY
Our multilateral compression technology:
- Reduces outstanding gross notional exposure
- Maintains counterparty credit risk exposure
- Maintains net value exposure Improves capital ratios
- Lowers capital charges
A UNIQUE APPROACH TO INITIAL MARGIN OPTIMIZATION
The efficient management of counterparty credit risk exposure has become a key consideration for regulators and clearers. This has resulted in:
- Matches off FX settlement date exposure in forwards
- The efficient management of counterparty credit risk exposure has become a key consideration for regulators and clearers. This has resulted in:
These have increased collateralized trading costs and restricted firms’ ability to utilize inventory for trading purposes. Neglecting to consider the overall impact of margining across CCPs and bilateral counterparties may also adversely affect leverage ratio liabilities.
PRODUCT COVERAGE
Swaptioniser is the first service that provides rates and FX portfolios with a combined swap and option compression cycle.
This extensive product coverage creates highly efficient compression opportunities due to the range of potentially offsetting positions.
Interest rates: IRS, FRAs, OIS, basis swaps and cross-currency swaps, swaptions, IROs, caps and floors. Multiple currencies.
Capitalab is an approved compression services provider at the London Clearing House (LCH), so we can provide a combined multiproduct rates solution across an entire cleared and non-cleared portfolio.
FX: FX options, FX swaps, FX forwards and cross-currency swaps. All major currency pairs. We are expanding into APAC and LATAM.
Capitalab has a service agreement with world-leading FX settlement, processing and data solutions services provider CLS Group. This gives access to FX forwards and swaps data in all CLS settlement-eligible currencies.
MULTIPLE TRADING PREFERENCES
OTC derivatives markets have successfully risen to these challenges by the widespread adoption of technology-driven solutions that have made OTC products keenly competitive against exchange-traded derivatives, whilst maintaining the attraction of their contract flexibilities.
PRODUCT THE OTC MARKET RESPONSE
OTC derivatives markets have successfully risen to these challenges by the widespread adoption of technology-driven solutions that have made OTC products keenly competitive against exchange-traded derivatives, whilst maintaining the attraction of their contract flexibilities.
The third-party, specialist risk reduction service provider plays a decisive role in maintaining OTC competitiveness, whilst simultaneously protecting the market against systemic counterparty risk.
Capitalab is an industry-leading service provider. Both margin optimization and compression work best when applied to as many potential trades as possible. The key to our success is a combination of:
- Advanced algorithms that can deal with the widest range of liner and non-liner products
- A deep liquidity pool with multiple large-scale participants
PRODUCT COVERAGE
We have been an innovator in optimizing IM for bilateral, uncleared trading and across multiple clearers. Capitalab has the ability to include a wide range of products into a single calculation. This is a key element for portfolio optimization.
The contribution of option margins in particular is complex to analyze, but they are potentially major contributors to portfolio cost reduction. RATES: Swaptions, interest rate options and interest rate waps in multiple currencies FX: FX options and forwards
RATES:
Swaptions, interest rate options and interest rate waps in multiple currencies
FX:
FX options and forwards
BASIS RISK MANAGEMENT
Capitalab NDF Match also provides a more user-friendly and efficient way to manage basis risk. Traders are able to:
- Hedge both buy and sell strategies
- Roll over contracts to the following month or quarterly IMM date
- Vary the contract tenor Change requested transactions after
Capitalab NDF Match also provides a more user-friendly and efficient way to manage basis risk. Traders are able to: Capitalab NDF Match also provides a more user-friendly and efficient way to manage basis risk. Traders are able to:
FUNCTIONALITY
Capitalab provides an integrated bilateral and cleared multilateral margin management solution across exchange-traded and OTC derivatives.
Our world-leading optimization algorithms allow our clients to significantly reduce IM requirements by comparing the margining outcomes of various trade choices to discover the lowest cost between:
- Cleared or uncleared trade route
- Choice of CCP (cost and liquidity)
- Potential for offsets between OTC and exchange traded derivatives (ETD) positions
- Broker choice (multi-broker management)
Broker choice (multi-broker management)
The resulting positions can be further improved by placing them in the next Swaptioniser® compression run. This will free-up more margin by reducing both the gross notional and counterparty risk.
Capitalab has direct SEF access for all eligible trades. Our optimization service runs provide straight-through-processing (STP) via MarkitWire.
INITIAL MARGIN OPTIMIZATION
The phasing-in of the UMR across jurisdictions since 2016 is bringing an increasing number of derivatives market participants into scope. There is now a widespread need for better management of initial margin that expands far beyond the major broker-dealer banks.
The identification of IM is a risk-based calculation that can be an extremely resource-intensive process. Central clearing counterparties (CCPs) each use a proprietary calculation model, based on either SPAN or VAR. The bilateral OTC market has coalesced around the ISDA’s standard initial margin model (SIMM) methodology. A proprietary SIMM IM model will be constantly assessed by counterparties and regulators. It will need constant updating and back-testing. For most participants, a specialist service provider is best placed to run these calculations.
Obviously, this onerous management process can be avoided by choosing a cleared trade route, but many trades – such as swaptions, cross-currency IRS and most non-deliverable forwards (NDFs) cannot be centrally cleared due to their tailored features. Here, a SIMM IM model provider is essential.
Capitalab – with its advanced algorithms and access to a SEF and LCH, is able to optimize cleared and non-cleared portfolios simultaneously. Capitalab minimizes IM costs by running multilateral optimization between numerous counterparties. This powerful process saves margin costs and reduces the amount of eligible collateral capital that would otherwise be isolated in a segregated account.
The resulting positions can then be further optimized by reducing outstanding gross notional exposure in the service provider’s next compression run.
COMPRESSION
Compression is an administrative process that identifies offsetting positions and replaces them with a new trade that captures the net position, leaving the market exposure unaltered whilst reducing the gross outstanding. In the process of reducing counterparty risk, the gross compression reduces the client’s margin liabilities as the IM on the new, replacement contract will be significantly lower than the variation margins required to maintain the original positions.
The practice originated with bilateral book compression between major sell-side dealers. Since 2016, multilateral compression by third-party vendors has greatly increased the potential scope and efficiency of the tool. A risk reduction service provider has access to multiple dealers. This large liquidity pool of similar products offers potentially far greater opportunities to reduce each participant’s gross notional exposures. The service provider runs a periodic offsetting run between multiple participants, which is called a compression cycle. Capitalabs includes cleared and non-cleared trades in the same run.
Compression is most complex with OTC derivatives, where even vanilla products will have various payment dates, so multilateral compression is the best solution to find matching dates. It is particularly challenging to be able to compress tailored products such as swaptions, caps and floors, and FX options. It is most challenging of all to compress tailored and vanilla products, linear and non-linear, in the same run. To date, only Capitalab has the ability to do all of these.
An enhancement on the compression process for vanilla products is to engage in position management between non-cleared and cleared trades – offsetting risks in bilateral portfolios with risks in cleared portfolios. The aim is to identify and move risk into the cleared portfolio wherever possible. This is done by entering into a new non-cleared transaction that fully offsets residual exposures in the non-cleared portfolio and rebuilds the market exposure by entering into a new transaction that can be cleared. This then assists with the initial margin management because a cleared IM requirement is lower than an uncleared margin requirement (UMR).
The combination of these technology solutions has contributed to a significant reduction in systemic risk across OTC and cleared derivatives markets, whilst simultaneously increasing trading cost savings and reducing counterparty risk exposures for each client.