New TriOptima Service Hangs in the Regulatory Balance
A new proposed service from TriOptima promises huge reductions in counterparty risk for interest rate swap transactions, but could be dead in the water even before it goes live.
That is, unless it passes regulatory muster.
Apparently, regulators might think the new service called triBalance could violate current regulatory requirements that standardized swap deals be cleared through central clearinghouses, which would be approved. However, TriOptima doesn't think so. In fact it submitted a letter in May explaining the merits of the new triBalance service to the U.S. Commodity Futures Trading Commission and why its process it uses isn't the same as central clearing.
For its part, TriOptima describes triBalance as a risk rebalancing service which generates a "compound transaction" which is in reality is a bespoke non-standard transaction; therefore, it is line with current regulatory requirements and neither the transaction itself nor any of its components should be subject to mandatory central clearing. Owned by ICAP, the world's largest interdealer broker, TriOptima offers post-trade services for swap transactions such as compression and reconciliation.
"The risk rebalancing service we are proposing will give financial institutions the tools necessary to manage portfolio risk pro-actively on an industry-wide basis," says TriOptima's group chief executive Pers Sjoberg in the May letter to the CFTC. "It will be a tool enabling financial institutions to clear the [residual] risk from non-clearable transactions."
In a statement issued to www.iss-mag.com on Wednesday, Susan Hinko, TriOptima's global head of industry relations in New York, says that since May TriOptima has continued testing triBalance and "refining its process." The firm anticipates completing live runs in the fall. Hinko won't elaborate how triBalance's methodology may have been altered, if at all, since its conception.
Using a "multilateral optimization engine," triBalance calculates the risk a broker-dealer is exposed to with counterparties and a clearinghouse. Based on data provided by broker-dealers on uncleared interest rate swap positions, triBalance will come up with a set of new rebalancing trades to reduce risk. Doing so, will lower initial margin requirements, regulatory capital, margin volatility, and hedging costs, among others, says TriOptima. However, the new set of trades could technically be required to go through central clearing, if the CFTC decides.
In an April statement announcing the creation of triBalance, TriOptima said that pilot tests of the service with nine dealers reduced counterparty risk exposure in their positions of cleared and uncleared trades by 33 percent. In hard dollars, triBalance generated a $2.7 billion reduction in future exposures across the participants. That figure assumes a 10 basis point move in interest rates and the potential risk reduction could be even higher in periods of extreme market volatility, said TriOptima.
Written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com)