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Traiana sees possible $30 million savings for OTC equity markets

Traiana sees possible $30 million savings for OTC equity markets 

Traiana, the leading provider of pre-trade risk and post-trade processing solutions, today announces the publication of a white paper that highlights significant gains for the industry as a result of the netting benefits found during the automated central clearing of OTC equity trades, across pan European clearers on an interoperable basis. 

The paper, produced in conjunction with Deutsche Bank, Instinet and J.P.Morgan, highlights substantial cost savings, increased transparency, and risk reduction for the industry as a result of improved opportunities for netting, leading to reduced settlement volumes and increased efficiency. 

Laura Craft, Director of Product Strategy at Traiana said, “Over 90% of all OTC equity trades are eligible for clearing. Of the trades currently sent for clearing, over 80% achieve successful settlement. The cumulative impact of central clearing on the market, as eligible transactions are added, is substantial.” 

Using Traiana’s Harmony CCP Connect service, participating banks acting as executing brokers and/or prime brokers can match and clear OTC equity trades at their preferred clearing house. Traiana sourced trades also enjoy a later netting cycle cut off of 18:30 rather than the overall market’s 17:30, increasing the time available for successful netting and subsequent cost and efficiency savings.  In the year since the service has gone live, some of the largest executing brokers are actively using the service, and have seen direct and measurable benefits as a result. 

The paper finds that savings for the equities market overall could be as high as $30 million per year, made up of a combination of benefits including:

  • Reduced volume of trades requiring bilateral settlement. This reduction grows exponentially as more brokers use central clearing, and positions with one counterparty can be netted off against the bank’s position, with another counterparty also clearing via the CCP; 
  • Reduced fail trades (trades that cannot be completed even though both counterparties have agreed to and confirmed the trade) and associated costs and fines. The bulk of failed trades are the result of a clients’ failure to deliver, mismatching or technical error. Traiana and its clients believe that overall fail volumes could drop by as much as a third as a result of central clearing; 
  • Reduced borrowing, funding and margin costs as overall settlement volumes and delivery requirements decrease. Overnight funding for this activity is estimated as being reduced by as much as 20%; 
  • Reduced counterparty risk as a result of the ability to settle multilaterally while increased volumes see a reduced impact on resource and are no longer creating barriers to new trading activity. 

Fabrice Carrier, Managing Director, JP Morgan said, “For combinations that are live on CCP Connect, we’re seeing 93% of eligible trades being successfully cleared. As additional brokers and prime brokers come on board, there’s no reason not to see similar percentages across all live combinations.”  

Laura Craft, Director of Product Strategy at Traiana, added, “The cumulative effects of being able to net trades in a genuinely multilateral manner are significant. Using a CCP gives each participant a multiplier affect that allows one counterparty to net trades with another counterparty, against trades with another. This creates a very useful snowball affect for the market as a whole.”

Harmony CCP Connect provides a comprehensive cross-asset solution for OTC clearing via the Harmony Network, including connectivity to multiple CCPs across cash equities, interest rate derivatives, credit derivatives and foreign exchange derivatives.