OTC equity utility sees side benefits to central clearing

An OTC equity clearing platform developed by Traiana demonstrated some unexpected efficiencies during the China market crisis.

Post-trade technology provider Traiana says its clients have reported a number of unexpected benefits from using its OTC equity clearing platform, Harmony CCP Connect.

Since launching the platform in October 2014, Harmony users have highlighted additional efficiencies gained through the use of the clearing utility, particularly around the sudden burst of trading activity seen when Chinese markets faltered earlier this year.

Laura Craft, director of product strategy – equity and fixed income, at Traiana, said: “What we’ve seen since we launched Harmony CCP Connect is a number of side benefits have emerged that we didn’t quite expect, such as better reducing the workload placed on settlement teams, reduced failed trades and lower margin costs.”

As part of launching the service, Traiana worked with the three pan-European clearing houses, EuroCCP, LCH.Clearnet and Six X-Clear, and their regulators to push back netting cycle times to 18:30 UK time, in order to make a greater pool of trades eligible for clearing, extending the netting benefits gained.

Traiana estimates that the associated savings to settlement costs for banks are significant, at an average of $1.46 per trade settled, saving a bank upwards of $2.2 million annually in settlement fees. Furthermore, Traiana said the overall cumulative impact on the market could see savings of up to $30 million annually.

“We expect that as we add more banks, and we’re hopeful we can have all the tier 1 banks on-boarded during 2016, the scale of efficiency will continue to improve as we have a wider pool of trades to provide netting benefits,” added Craft.

One of the key benefits and source of savings is on failed trades due to removal of bilateral settlement in OTC equities, which can prone to client failure to deliver, mismatching and technical errors. One Harmony CCP Connect user estimated market fines for failed trades were down by approximately 30%.

In particular, users found that during times of market turbulence, such as that seen during the Chinese equity crisis in August 2015 when unprecedented volumes were seen across all trading types, including OTC equities.

Craft explained: “Events in China earlier this year saw huge trading volumes which in the past would have been bottlenecked due to demands on clearing and settlement resources but we found with CCP Connect many of the associated problems with sudden demand spikes did not affect users.”

One executing broker using Harmony added: “This process is ensuring that we become agnostic to volume. By going through a clearing model, you eliminate this volume cap. Using our current processes, we’re very efficient but there’s no room for improvement. This is what we need for the future.”