Traiana’s launch of Harmony CCP Connect for Equities provides efficiency and cost savings as CCPs net these transactions alongside existing on-exchange flow, reducing the cost of settlement. Traiana estimates that participants could reduce settlement costs for OTC equity trades in EMEA by up to $30 million on an annual basis.
“We have a line of products that help in clearing on multiple assets, and almost all of them started on the back of regulatory change and the move from bilateral to cleared,” said Roy Saadon, head of EMEA and co-founder of Traiana. “In equities, the market took the initiative and pushed for it. The market approached us with the idea to try to clear bilateral equity trades.”
The transfer of OTC equity trades from the existing bilateral settlement model to a central clearing (CCP) model represents a proactive approach by the industry to reduce counterparty risk, increase transparency and assist in achieving T+2 settlement through trade compression..
Traiana’s Harmony CCP Connect provides cross-asset OTC clearing via the Harmony Network, including connectivity into multiple CCPs for cash equities, interest rate derivatives, credit derivatives and foreign exchange derivatives. In addition to efficiency and cost savings, participating brokers benefit from the reduced counterparty risk and operational overhead resulting from using a CCP.
Roy Saadon, Traiana
Although the idea of centrally cleared bilateral OTC equity trades isn’t new, historically there were a lot of regulatory roadblocks that prevented it from materializing.
“We had to work with three different regulators,” said Saadon. “We had to work with the Dutch regulator, the UK regulator, and the Swiss regulator, and all of them had to agree to a new protocol to make this offering viable. It was a market-led initiative. We had to bring in the regulators, but it wasn’t driven by regulation.”
Credit Suisse, J.P. Morgan and Instinet have automated the central clearing of their OTC equity trades via Harmony CCP Connect in order to match and clear equity contract for difference (CFD) related hedging trades at their preferred clearinghouse. CCP Connect for Equities has a total of five banks connected to the network and is currently connected to three CCPs—LCH.Clearnet, EuroCCP and SIX x-clear.
“Now that the product has been proven, the exercise is to complete the network with regards to additional banks,” Saadon said. “Another goal is to extend beyond synthetic equity derivatives to any bilateral inter-bank trade.” Geographically, the company is looking to increase the product’s presence in Europe and then move into Asia.