Specialist financial markets consultancy Catalyst Development Ltd have today (19th June 2014) released a new white paper describing how banks and market participants can release significantly greater amounts of capital by maximising the impact of their compression cycles.
Titled ‘Compression: three vital steps to maximise capital efficiency’, Catalyst’s latest whitepaper is an advisory note to clients. It outlines a three step ‘maximise, minimise and optimise’ approach to compression that will allow banks and market participants to compress complex trades and release dramatic amounts of capital, without compromising the integrity of their trades.
Authored by Catalyst experts Tom Lodge and Sean Coote, the whitepaper states that for anyone charged with increasing capital efficiency, compression should be firmly front of mind. However they also argue that this is not the compression of a decade ago. Basel lll and CRDlV leverage ratios have placed a firm focus on Gross Derivatives Exposures. The netting possible under Basel II is no longer an option, while at the same time the volume of trades continues to rise inexorably.
The paper goes on to discuss the complex conditions that mean many firms still only achieve a fraction – perhaps less than half – of their optimum ‘unwind ratios’. This is despite the fact that compression is theoretically a mature process that has been used for years to unwind multiple matched trades while keeping risk within set tolerances.
The authors argue that what has happened is that non-controversial, easily found and clearly matched trades were unwound long ago, leaving banks with tougher issues. Multiple books and the cumulative loss of submissions at all stages of the process are reducing algorithms’ effectiveness and making unwind cycles increasingly expensive.
Today, they suggest, the real challenge – and the greatest prize – is to unwind the maximum volume of complex trades in order to make the most dramatic capital savings.
The paper concludes with a view that as market leaders in their field, Catalyst believe it is possible for banks to more than double the effectiveness of the compression process and make major, demonstrable capital saves by doing so.
The paper is available to download via the Catalyst website.
Headed by Christian Lee, Catalyst’s Clearing, Risk and Regulatory practice are leading experts in optimising clients’ balance sheet, reducing the total cost of trading and enabling regulatory compliance.
This whitepaper forms the latest in Catalyst’s regular series of Knowledge Capital events and advisory papers for clients.