Traiana sees savings potential for OTC equity markets


A study of potential savings from the automated central clearing of over-the-counter (OTC) equity trades across pan European clearers identifies potential annual cost reductions of up to US$30m, reports Traiana.

The financial markets software specialist issued a white paper in conjunction with Deutsche Bank, Instinet and JP Morgan, highlights substantial cost savings, increased transparency, and risk reduction for the industry from improved opportunities for netting, leading to reduced settlement volumes and increased efficiency.

The paper suggests potential savings for the equities market overall could be as high as US$30m per year, reflecting a combination of benefits including:

  • Reduced volume of trades requiring bilateral settlement. This reduction grows exponentially as more brokers use central clearing, and positions with one counterparty can be netted off against the bank’s position, with another counterparty also clearing via the central counterparty clearing house (CCP).
  • Reduced fail trades (trades that cannot be completed even though both counterparties have agreed to and confirmed the trade) and associated costs and fines. The bulk of failed trades are the result of a clients’ failure to deliver, mismatching or technical error. Traiana says that overall fail volumes could drop by as much as a third as a result of central clearing.
  • Reduced borrowing, funding and margin costs as overall settlement volumes and delivery requirements decrease. Overnight funding for this activity is estimated as being reduced by as much as 20%.
  • Reduced counterparty risk as a result of the ability to settle multilaterally while increased volumes see a reduced impact on resource and are no longer creating barriers to new trading activity.

“Over 90% of all OTC equity trades are eligible for clearing,” said Laura Craft, director of product strategy at Traiana. “Of the trades currently sent for clearing, over 80% achieve successful settlement. The cumulative impact of central clearing on the market, as eligible transactions are added, is substantial.

“The cumulative effects of being able to net trades in a genuinely multilateral manner are significant. Using a CCP gives each participant a multiplier effect that allows one counterparty to net trades with another counterparty, against trades with another. This creates a very useful snowball effect for the market as a whole.”


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