CLS has collaborated with TriOptima, a leading provider of OTC derivatives post-trade risk reduction services, to deliver the triReduce CLS Forward FX Compression Service – the first portfolio compression service in the FX market. This new service will bring several important benefits.
Portfolio compression services
Portfolio compression is a post-trade risk management tool that enables counterparties to reduce the size of their outstanding portfolios without fundamentally changing their market positions. In the FX context, forwards and swaps among multiple counterparties are terminated and replaced with new transactions whose combined notional value is less than the original combined notional value of the terminated trades. The diagram below illustrates how an organization’s FX forward positions can be transformed through the triReduce compression service:
Source & Copyright©2015 - CLS Group
triReduce CLS Forward FX Compression Service flows
CLS provides matched, forward-dated trade data for participating settlement members to TriOptima for use in its compression service - triReduce, see figure below:
Source & Copyright©2015 - CLS Group
Initially, the compression cycle will be run once a month and will include the following stages:
- trade submission and matching – CLS provides all eligible forward-dated trade data for participating settlement members to TriOptima
- TriOptima presents trades eligible for compression to participating settlement members through the triReduce website
- dress rehearsal – participating settlement members agree on the set of trades eligible for compression and provide the necessary risk parameters required by TriOptima to run the compression cycle
- live execution – TriOptima runs its compression algorithm on the agreed set of trades using the risk parameters submitted by participating settlement members and recommends a set of termination and replacement trades for agreement
- downstream processing – upon agreement, participating settlement members rescind the original trades and book the replacement trades. They will then settle the trades by submitting the new instructions to CLS in the same manner they submit all other FX instructions for settlement.
Peter Weibel, CEO of triReduce, TriOptima’s compression service, believe that: "It is more than just netting, compressed trades will actually cease to exist, eradicating the costs and risks associated with those trades. It is the multilateral nature of the process that makes compression so powerful; the more participants there are using the service the greater the offsettable volumes for all, quite in contrast to bilateral compression, where not much can be achieved."
CTMfile take: The triReduce CLS FX Forward Compression Service will enable participants to reduce the gross notionals of their outstanding portfolios without fundamentally changing their market positions. As well as benefiting from reduced operational, counterparty exposure and credit risk; plus improved leverage ratios, enhanced capital efficiency and improved regulatory compliance. This is a major step forward to the FX market. However few corporates will have the scale to take advantage of this new service.
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