Their award-winning collaboration is an effort to simplify derivative portfolios and notionals, and cut counterparty exposure and costs.
(A joint solution of CLS and TriOptima, dubbed triReduce CLS FX, won the Best New Post-Trade Solution honor of the 2019 FTF News Technology Innovation Awards. The offering hit just as international regulators were advocating for compression services that support non-centrally cleared over-the-counter (OTC) derivatives. FTF News got time with Michael Modlock, global head of sales and relationship management at TriOptima, and Angus Scott, head of product at CLS, to discuss the many issues that their offering addresses. Modlock began his time at TriOptima’s London office in 2004 and moved to New York in 2006, where he became head of triReduce North America. Among his achievements, Modlock served on CFTC’s Market Risk Advisory Committee from 2015 to 2018, which is focused on improving market conditions and reducing systemic risk. Scott is responsible for a portfolio of new forward-thinking products across the three business lines of CLS — settlement, processing and data. He has more than 20 years of experience in capital markets infrastructure and securities services, and has been specializing in product management, strategy and strategic change management. Prior to CLS, Scott spent six years at Euroclear where he was head of product strategy and innovation for the post-trade provider. He also served in executive roles at HSBC Securities Services and the London Stock Exchange. Modlock and Scott collaborated on the answers to our questions.)
Q: Why did CLS and TriOptima decide to work together? What conditions made the collaboration possible?
A: The collaboration between CLS and TriOptima was fostered as international regulators encouraged compression services for non-centrally cleared OTC [over-the-counter] derivatives.
Designed to reduce operational, credit and counterparty risk and enhance capital efficiency for institutions, compression had already been best practice in the rates business for over a de
cade, so the solution was simply to adapt the service for FX.
The triReduce CLS FX collaboration made sense because it combined the unique qualities from each firm; CLS’s infrastructure and market connectivity plus TriOptima’s multilateral compression algorithm.
The service enables counterparties to reduce the notional of their outstanding portfolios without fundamentally changing their market positions while maintaining the integrity of the population within CLS.
Q: Why was a new offsetting methodology needed?
A: Some firms wanted the best leverage ratio improvements irrespective of notional, while others could process new trades more easily than compressions.
Providing the ability to offset exposures as well as compress created additional flexibility, giving clients the option to improve their capital efficiency either through classic notional reduction or by booking new trades to offset existing exposures.
Offsetting is particularly valuable for prime brokerage businesses, who are motivated to reduce exposures but may be unable to physically tear up the client leg of the trade.
Q: Why did the new methodology increase participation?
A: By combining the functionality so that firms could use both compression and offsetting options simultaneously, clients could maximize leverage ratio improvement and RWA reduction at the same time, as well as the PFE component of SA-CCR.
Furthermore, delivering the replacement trades via STP reduced operational workload, leading to greater participation and, in turn, higher compression efficiency. This all fuelled the positive trend on which we continue to build.
Q: Why was full straight through processing (STP) such a priority?
A: STP is key to making the service easy to use by simplifying the trade workflow and eliminating potential errors associated with manual booking.
Additionally, banks need to maintain accurate records given the thousands of trades involved, which must be matched and ready for settlement in CLSSettlement.
With such volumes, reconciliation is extremely important for treasury operations. Our STP capabilities align with the industry-wide goal to reduce manual touch points as much as possible, reduce operational risk and allow trades to be reconciled in the minimum time possible.
Q: Do you have an update on the effort between TriOptima and Traiana to deliver a single solution for prime brokers’ transactions?
A: We collaborated with Traiana to provide a universal solution for the FX PB/EB trade booking workflow, which is available today. This is an initial phase solution that we worked on with the prime brokers’ input, and we continue to discuss with firms as to where else we can add value.
Q: How have third parties reacted to the CLS FX service extension?
A: The capability to compress FX forwards and swaps has the potential to not just simplify derivative portfolios and notionals, but ultimately to reduce counterparty exposure and costs.
We are engaged with several interested third parties who see value in more efficient post-trade management of FX derivatives portfolios.
Q: What is coming up for the rest of 2019 and beyond?
A: Compression remains less mature in FX markets than in others, and this is a focal point for banks based on current regulatory conditions.
We anticipate continued growth and demand for the service from banks, prime brokers and clients.
Looking forward, our existing methodology already supports optimization under SA-CCR [standardised approach for counterparty credit risk] so we are well placed in terms of future proofing the value of the service for clients once SA-CCR is implemented.