LONDON, Feb 9 (IFR) - Quantile Technologies, which recently partnered with the AcadiaSoft margin hub, has completed its first large-scale counterparty risk reduction exercises with swaps dealers, achieving material reductions in initial margin requirements for participants.
The first runs got underway in mid-January and included Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Nomura, RBS, Standard Chartered and UBS.
Quantile’s service aims to reduce risk between market participants by identifying trades and rebalancing strategies to reduce margin requirements on uncleared trades including swaps, options and non-deliverable forwards.
Margin requirements on uncleared swaps trades have surged since sweeping reforms forced banks to post initial and variation margin against those exposures. The rules went live in the US last September and took effect in Europe earlier this month.
An study from the Bank for International Settlements suggests that collateral requirements stemming from uncleared swap margin rules could reach US$1trn.
“Total margin could easily get into the hundreds of billions over the next couple of years and we think that we could generate significant savings,” said Stephen O’Connor, chairman of Quantile. “We continue to believe that savings of up to 50% are a reasonable target.”
Margin savings stemming from the risk reduction exercises vary from dealer-to-dealer and from week-to-week depending on positions. While most dealers run relatively flat books, they can have long or short exposures with a particular counterparty at any given time.
Quantile presents clients with daily risk reports and bi-weekly risk reduction runs that detail a series of trades to achieve cost savings. Banks then choose whether to enter into those trades, with early indications suggesting that they are acting on the information.
”By entering into the risk reduction trades, participants can reduce margin requirements, saving valuable economic resources and as a result run their operations more efficiently,” said O’Connor. “Those cost savings can be reflected in improved pricing, which also leads to increased liquidity for end user clients.”
An additional four global banks are expected to join in the coming weeks and the firm is in talks with large buyside participants, which will be covered by the new rules in additional waves out to 2020.
Formed in 2015 by a team of derivatives risk management professionals, Quantile was added as a premium service on Acadia’s margin hub late last year. The hub enables market participants to communicate derivatives exposures and manage commitments and adjustments between counterparties.
Analysis for the risk reduction exercise is completed using data that is already being inputted into AcadiaSoft by all 24 tier one banks caught in the first wave of margin rules. (Reporting by Helen Bartholomew)