With regulation driving derivatives trading firms to make decisions on their approach to mandatory OTC clearing, they will be weighing up CCPs’ competing claims about potential cost savings that can be derived from cross-margining. However, attempting to separate the hype from the reality can be difficult, while at the same time potentially significant given the possibility of up to 35% reduction on the hundreds of millions of dollars in initial margin posted by even medium sized firms.
Ultimately, in order to understand the potential benefit they can derive, firms need to be able to base analysis on their own portfolios, rather than a theoretical one provided by a CCP. They also need to ensure that the results are stable from day to day, and that they understand how specific features of a particular margin methodology impacts their portfolio to generate the differences (i.e. margin explain). This requires direct comparison of the margin calculations of multiple CCPs, across multiple days, using actual positions, real market data, and backed by analysis based on detailed understanding of CCP methodologies.
Until now, for a firm looking to perform an accurate assessment of clearing services, there has been no easy answer. The options have been limited to either one-off analysis performed by a clearing broker or CCP, or direct usage of the CCP client tools. There hasn’t been a good solution that offers both flexible and detailed multi-CCP analysis, while avoiding the upfront resource investment required to directly use the CCP tools.
The solution: A new monthly subscription service provided by OpenGamma
Today we launch a new calculation service that makes it easy to run this analysis on your actual portfolio. The service aims to make valuable CCP margin comparison available to both buy and sell side firms with a minimum of upfront investment.
With no knowledge of CCP tools required, it allows a user to load OTC and ETD positions in the same formats you already use (including the formats supported by the CCPs). The hosted service requires no software installation, and is available with as little as one month’s commitment. The initial release supports LCH SwapClear and Eurex Clearing, with future CCP coverage to be added based on demand.
How does it work?
As an example, the service allows the user to analyze the savings of cross margining ETD and swaps. In the following example, the service compares two scenarios
i) OTC cleared at LCH and ETD cleared at Eurex
ii) OTC and ETD both cleared at Eurex
The OTC trades cleared at LCH create €172m of initial margin, and the futures cleared at Eurex create €77m of margin for a total of €249m. On the assumption of clearing both the OTC and ETD trades at Eurex, the overall initial margin drops to €182m, an overall saving of 27%.
The DV01 analysis below shows how the Eurex margin methodology (PRISMA) maps exposures into 4 different maturity buckets. PRISMA then determines the optimum amount of ETD exposure to move across from the 2d margined ‘ETD’ netting set (in the 3.5-7 and 20+ buckets) to hedge the OTC exposure in the 5d margined ‘Swap’ netting set, hence reducing the overall margin requirement across both netting sets.
To find out more about this service, please email Ken Wong or call him on +44 (0) 20 3725 3376.