Firms seek optimisation gains as UMR and SA-CCR bite

A wider range of market participants is taking advantage of service providers such as OSTTRA’s optimisation cycles to drive margin and counterparty credit risk efficiencies across asset classes including FX, rates, equities, commodities and credit

With the transition to a new capital regime on counterparty risk and uncleared financial instruments largely complete, in the past year, market participants have increasingly turned to service providers such as OSTTRA to reduce gross notional and counterparty exposure in the most efficient manner.

Since the last phase of the uncleared margin rules (UMR) was rolled out in September 2022, coupled with the shift from the current exposure model to the standardised approach to counterparty credit risk (SA-CCR), market participants across most jurisdictions have been compelled to closely monitor their exposure to each counterparty to minimise the amount of initial margin they would potentially need to post.

“Through our services, clients can significantly optimise counterparty credit risk across multiple bilateral relations without impacting their market risk profiles,” says Christina Högegård, business manager, triBalance and triReduce at OSTTRA. “In doing so they reduce their initial margin under UMR, their cleared initial margin and their capital requirements under SA-CCR and the internal models method [IMM].

“By regularly using a service like OSTTRA triBalance, our clients can continuously lower the amount of margin they need to post. Optimising their exposures across multiple counterparties means they can reduce the amount of regulatory capital held for that purpose, freeing it up for use elsewhere,” she explains.

Until recently, optimising counterparty risk was largely the concern of global systemically important banks (G-sibs). As more firms are captured by UMR and with the new capital regime in place, that concern has filtered down to smaller sell-side players that have joined OSTTRA’s network in growing numbers over the past year. The buy side is also showing increased interest in optimisation.

By connecting G-sibs with wider banking, buy-side and central counterparties across its global network, OSTTRA helps market participants optimise capital allocation and counterparty credit risk across a range of asset classes including FX, rates, equities, commodities and credit. Interest has grown – particularly among market participants with significant exposure to the rates and FX markets, as record-breaking optimisation cycles in these asset classes are regular occurrences.
 

Optimisation runs

To generate the best results, market participants take part in regular optimisation runs, the frequency of which depends on the asset class they wish to optimise. The most frequent runs are conducted for FX, and participants can optimise initial margin, leverage ratios or risk-weighted assets – or all three at the same time.

Frequency is driven by demand and is based on what market participants feel works best for the exposures they have in a particular asset class. So, currently, rates run bimonthly, equities monthly and credit runs on an ad hoc basis.

“With weekly FX optimisation runs, we give participants the opportunity to optimise initial margin frequently and see that the benefits last for some time. Some choose to optimise weekly and some less frequently. In addition to initial margin, they can also optimise SA-CCR and IMM [exposures] in the same runs, as often as they wish,” says Högegård. 

“The incremental benefit of optimising more frequently needs to be weighed against the resources used and additional notional put on. However, the benefit is greatest the day after the optimisation run and, with a fully automated process, participants could optimise every day.”

At the start of a run, market participants upload the exposures they wish to optimise to the OSTTRA triBalance portal along with any conditions they would like to apply. An optimisation algorithm analyses clients’ chosen exposures and provides them with a detailed proposal outlining how their portfolio can best be optimised according to their requirements. Each optimisation run will typically start and be finalised within half a day.

The potential for optimisation of any given portfolio is contingent on its inherent composition, the asset classes involved and on the directionality of the trades.

“Every portfolio has a very different starting point and potential depending on its underlying structure,” says Högegård. “This is why we thoroughly analyse each portfolio and our multi-targeted algorithm to make sure our clients are getting the most out of each proposal and achieve the best possible results.”

As OSTTRA’s network grows, and more firms reach their UMR thresholds on the back of increased volatility and high interest rates, the optimisation potential of each run increases accordingly.

“Regardless of their motivation for using our services, the ability to face as many counterparties as possible is important in terms of getting the most out of the service,” concludes Högegård.
 

OSTTRA was named Best compression/optimisation service for FX at the FX Markets e-FX Awards 2023.
 

<sub>This article is for information only. OSTTRA Group Ltd and its subsidiaries, including TriOptima AB (referred to hereafter as “OSTTRA”) makes no warranty – express or implied – to the accuracy, timeliness or completeness of the information given here, or as to the results to be attained by you or others from its use, and shall not be in any way liable for any inaccuracies or omissions. You hereby acknowledge you have not relied upon any warranty, guaranty or representation made by OSTTRA. The information herein is not – and should not be construed as – an offer or solicitation to sell or buy any product, investment, security or any other financial instrument, or to participate in any particular trading strategy. Without limiting the foregoing, OSTTRA shall have no liability whatsoever to any recipient, whether in contract, in tort (including negligence, under warranty, under statute or otherwise) in respect to any loss or damage suffered by any recipient as a result of or in connection with any information provided, or any course of action determined, by it or any third party, whether or not based on any information provided.

TriOptima AB is regulated by the Swedish Financial Supervisory Authority and operates the following services: triResolve, triReduce, triBalance, triCalculate and RESET. For more information, visit osttra.com</sub>

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