The share of centrally cleared trades in Traiana’s contracts for difference application for hedged equity trades has risen from 4% to 25% since automated clearing was launched.
Traiana launched Harmony CCP Connect for equities in October 2014 to automate the central clearing of OTC equity trades through any of three pan-European clearing houses – EuroCCP, LCH.Clearnet and Six X-Clear.
Fabrice Carrier, managing director at J.P. Morgan, said in a Traiana white paper: “The ability to match and compress via interoperable CCP’s removes the need for bilateral settlement of the underlying trades, and in doing so reduces the inherent risk of both settlement and counterparty failure.”
Users can match and clear OTC equity trades alongside transactions on exchanges to net all trading activity and use less capital. In addition they can cut the number of tickets that have to be settled and reduce costs and the number of failed trades. In August 2015 one CCP Connect client had reduced market fines for failed trades by 30% compared to the average for the rest of the year.
Laura Craft, director product strategy – equity and fixed Income at Traiana, said in the paper: “With over 90% of OTC trades eligible for clearing, brokers using CCP Connect to clear via a central clearer have the ability to net and clear more than 80% of these trades if all counterparties are connected.”
The paper showed that the total percentage of hedged trades related to contracts for difference that are cleared through CCP Connect compared to total flow in the Harmony CFD application rose from 4% in December last year to 25% in October 2015. There was a big jump in cleared volume when the cut-off time for the netting cycle was extended by 30 minutes to 18:30 in the UK.
Laura Craft ,Traiana
Traiana estimated that banks could save an average of almost $1.46 in settlement costs for each trade and $2.2m annually as more brokers and prime brokers join the service. “The cumulative overall impact on the market is significant and is estimated at $30m annually,” said the white paper.
In addition overnight funding costs could be reduced by as much as 20%.
One CCP Connect client said in the white paper: “The amount of capital that can be tied up by trades on the balance sheet is colossal. A reduction in failed trades reduces both the capital and funding requirements.”
Traiana Harmony CCP Connect for equities won the Markets Media award for Best New Clearing Product in February this year.
Roy Saadon, head of EMEA and co-founder of Traiana, told Markets Media at the time: “We had to work with the Dutch regulator, the UK regulator, and the Swiss regulator, and all of them had to agree to a new protocol to make this offering viable. It was a market-led initiative. We had to bring in the regulators, but it wasn’t driven by regulation.”
Credit Suisse, J.P. Morgan and Instinet have automated the central clearing of their OTC equity trades via Harmony CCP Connect and there are now six banks connected to the network.
Currently all OTC equities can be cleared on Harmony CCP Connect for equities, as well as foreign exchange, and Traiana may look to expand into other asset classes in the future such as fixed income. Traiana will also be looking at other geographical markets outside Europe where it makes demonstrable difference to the efficiency and cost of doing business
This week the Bank for International Settlements said it expects further growth in central clearing.
A report from the BIS said there has been significant growth since the G20 leaders pushed for mandatory clearing of over-the-counter derivatives in 2009. Last year more than half of the notional amount outstanding of derivatives transactions was centrally cleared, almost twice the percentage in 2009.
Last week the European Securities and Markets Authority said firms in the European Union will have to centrally clear certain interest rate swaps from 21 June 2016.
Esma said in a statement: “This marks an important milestone in implementing the EU’s post-financial crisis’ derivatives regulation – the European Market Infrastructure Regulation (Emir) – and follows the G20 commitment to clear all standardised OTC derivative contracts, where appropriate, through central counterparties.”
Feature image by Tijana/Dollar Photo Club