Traiana, a pre-trade risk and post-trade processing solutions, highlights significant gains for the industry as a result of the netting benefits found during the automated central clearing of OTC equity trades, across pa- European clearers on an interoperable basis.
In a paper produced in conjunction with Deutsche Bank, Instinet and J.P.Morgan, it identifies 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 percent of all OTC equity trades are eligible for clearing. Of the trades currently sent for clearing, over 80 percent achieve successful settlement. The cumulative impact of central clearing on the market, as eligible transactions are added, is substantial.”
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 percent;
- 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.