Post Trade Solutions
FX Smart Clearing was developed out of a need LSEG identified for solutions that simultaneously manage counterparty risk, initial margin (IM) and capital.
The introduction of SA-CCR increased capital requirements for FX, creating a new incentive to clear, assuming the differences in cleared and uncleared IM are appropriately managed.
How Smart Clearing works
Smart Clearing is an LSEG service, delivered by Quantile, that allows you to selectively clear FX Forwards to LCH ForexClear.
It intelligently selects existing uncleared trades to move to LCH ForexClear, and optimises portfolios with new rebalancing trades to reduce counterparty risk and the financial resources a participant must hold.
The optimisation can be fully customised, which means you can control risk and resource changes, as well as your preferred currency pairs and trading partners. You can also potentially compress your portfolios to reduce trade count and notional significantly.
By moving FX Forwards into LCH ForexClear, you benefit from multilateral netting, lower counterparty risk weights and settled to market (STM) treatment – all of which reduce capital requirements and counterparty risk.
Our optimisation service then ensures the risk reduction is achieved within the relevant IM and risk constraints.
The system in action
Smart Clearing is a simple, three-step process:
Trade selection
Participants sign-up for Quantile’s Capital Optimisation service, through which Smart Clearing is facilitated, and existing FX portfolios are assessed for Smart Clearing to LCH ForexClear or SwapAgent.
Trade booking
Smart Clearing acts on existing bilateral portfolios and provides bulk novations and backloads of FX products to:
- Send the maximum amount of risk to LCH ForexClear within counterparty-defined IM tolerances
- Send residual risk to SwapAgent so participants benefit from bilateral clearing
Ongoing management
Quantile’s regular multilateral optimisation runs will continue to feature LCH ForexClear and SwapAgent as additional ‘nodes’ to provide further optimisation. We can also offer on-demand Smart Clearing outside of our usual multilateral schedule.
The benefits
Smart Clearing unlocks several post-trade and clearing benefits:
- Reducing capital requirements under SA-CCR
- Holding risk more efficiently
- Access to multilateral netting
- Additional optimisation opportunities
- Trades are treated as settled to market (STM)
- Reduced risk within IM constraints
Bilateral Delta Sweep optimisation
LSEG’s proven optimisation technology materially reduces capital requirements – by up to 50%.
Our advanced algorithms analyse the risk between participants and rebalance cleared and uncleared portfolios with new market risk-neutral trades that reduce risk and improve capital efficiency.
We leverage a comprehensive multilateral network and adopt a flexible approach, enabling participants to target multiple metrics while adapting to evolving regulations and requirements.
How we achieve that
Capital optimisation also happens in three simple steps:
- You submit your data directly to us and set your risk constraints.
- We identify optimisation opportunities through our fast, intelligent optimisation engine and generate a proposal with a set of new market risk-neutral trades.
- You validate our optimisation proposal and accept it if you’re satisfied, after which new trades are executed, reducing counterparty risk and capital requirements.
We intelligently move risk into LCH ForexClear or SwapAgent so it can be held more efficiently so that you benefit from reduced capital requirements and greater margin, payment netting and settlement efficiencies.
Bilateral Delta Sweep optimisation
For trades ineligible for Smart Clearing, our Bilateral Delta Sweep service allows you to efficiently transfer risk into your chosen venue, reducing capital requirements and delivering multiple secondary benefits.
By sweeping your bilateral risk into SwapAgent, we help you reach peak efficiency by standardising portfolios and reducing your cleared and uncleared margin and capital requirements – without network dependencies and associated multilateral constraints.
With Bilateral Delta Sweep, you can access:
- Flexible optimisation with your chosen counterparty
- Reduced RWA due to the lower 2% risk weight
- Capital requirements lowered by 30-60% by sweeping to SwapAgent, plus margin, payment netting and settlement efficiencies
- Ability to sweep to the venue with the most favourable counterparty risk,
- capital and margin conditions
- Low-touch process
- Flexible run frequency – from daily to quarterly
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