Reducing Complexity in OTC Clearing

We are developing solutions for the OTC Clearing market place that will lead to reductions in cost, complexity and operational inefficiencies for market participants.

At REDUKTI LIMITED, we believe that there is an opportunity to provide an end-to-end OTC Clearing platform that is designed from the ground up for clearing of OTC trades. Currently the major OTC Clearing Houses deploy heavily customised versions of general purpose trading platforms. As these systems were not originally designed with clearing in mind, CCPs have had to build a large number of custom components to cater for their business needs. Unfortunately every CCP must incur this cost, which means that the cost of ownership is high. Additionally, the complexity introduced by the extensive customs add-on components makes the overall system fragile and difficult to change.

The excessive cost of implementation and operation also inhibits new players such as exchange traded clearing houses from entering the market for OTC clearing.

We want to offer CCPs a more cost efficient platform for Clearing OTC trades. We aim to reduce total cost of ownership by creating a platform that:

Our target customers are two-fold:

Regional CCPs that seek to implement a lower cost OTC clearing platform.

We also aim to build a product that is capable of running the world’s largest OTC clearing businesses. With the maturing of the OTC Clearing business, the largest CCPs will increasingly need to reduce total cost of ownership and gain competitive advantage by incorporating faster clearing and 24x7 service. With existing platforms this is difficult to achieve, and hence we see an opportunity to provide an alternative solution that addresses the shortcomings of existing solutions.

Disclaimer

Please note that the product specifications listed below are tentative and subject to change without notice. The planned delivery dates are also tentative and subject to change.

Messaging Gateways

Support for industry standard FpML based clearing workflow. The system will support all the standard FpML messaging for clearing workflows.

Feature Status Remarks
Accepts requestClearing message for clearing of trades.
Generates clearingConfirmed messages upon clearing. Q3 delivery

Clearing Workflow

Built-in support for the main CCP workflows.

Feature Status Remarks
Clearing of trades with real-time market risk calculation and limit checking.
Support for packages of trades.
Consent workflow. Q4 delivery
Allocation workflow. Q4 delivery
Portfolio Transfers (house and client). Q2 delivery
Operations dashboard and Operational Controls – including four eyes approval and audit trail. Q3 delivery

Account and Limit Management

The system supports Member House account, and major client account types such as ISA, Gross OMNIBUS and Net OMNIBUS.

Feature Status Remarks
Support for US and European clearing models.
Both EMIR and CFTC models for segregation of client accounts.
Limits can be assigned at various levels. Note that limits can only be set by value in the Liability Currency.

Trade Model and Pricing

Our design goal is to model trades in a way that allows adding new product types relatively painless.

Feature Status Remarks
In-built trade and pricing models for IRS and FRAs. IRS support includes Vanilla, Basis, OIS, Zero Coupon, Compounding, and Variable Notional/Rate/Spread swaps Pricing support for VNS swaps to be availabe in Q3
Inflation swaps Q3 delivery
FX NDFs Q4 delivery
Efficient calculation of sensitivities/greeks using innovative techniques The system employs an innovative automatic differentiation approach that can even calculate second order derivatives.
Both PAR and Zero deltas are calculated The implementation supports calculation of both Zero and PAR deltas for all available interpolation methods.

Market Data

The cornerstone of market data capability is the ability to bootstrap Interest Rate curves. The system supports bootstrapping of Zero curves using Cubic Spline or Monotone Convex interpolation methods in addition to Linear interpolation.

Feature Status Remarks
Will accept market quotes from customer’s market data systems
Support for calibrating interest rate curves using several interpolation methods including multi curve support An innovative Lua scripting approach allows input instruments to be defined in a flexible manner
Curve approvals
Market data refreshes supported without service interruption Trades can continue to be cleared while market data refresh is occuring
Currency level closing of market data System allows each currency to have its own closing intra-day thereby eliminating the need for global end of day closing

Risk Management

The system is being designed to compute a standard set of risk measures intra-day. This is in contrast to existing systems where a number of measures are only computed at end-of-day.

Feature Status Remarks
Support for both TDG and Full Historical simulation approaches to calculating P&L
Support for nth Worst Case Loss or Expected shortfall (average of top n losses) for calculating Initial Margin. Results from multiple VaR calculations can be combined by picking the worst exposure.
P&L calculation can handle multi-curve scenarios
Liquidity Margin calculation will support a PAR delta / liquidation cost model Q3 delivery
Stress testing will extend the Historical simulation aproach with user supplied synthetic scenarios Q3 delivery
Will support backtesting of margin adequacy Q4 delivery

Default Management

The Default Management functions of the system will be closely integrated with the Risk Management capabilities

Feature Status Remarks
Advise hedges for defaulted account Q4 delivery
Porting of defaulted accounts Q2 delivery
Creation of auction packs Q4 delivery

Post Trade Services

Support for post clearing portfolio management functions is planned for delivery in the second half of 2017. The system is being designed with these service in mind however.

Feature Status Remarks
Risk free netting of trades with compatible economics Q3 delivery The trade data model is designed with compression in mind. The trade economics are normalized and stored separately to enable easy identification of netting opportunities.
Trade amendments (correction of non-economic attributes) Q4 delivery
Margin optimisation advisory Q4 delivery

Reporting

Our approach is to ensure that the system has a fully documented data model, and empowers the customer to extract data as needed.

Feature Status Remarks
Fully documented data model and tools for extracting data Q3 delivery

Non-functional

High availability and scalability are important goals in our design.

Feature Status Remarks
System is designed for continuous availability with minimum downtime The backend services are designed to be redundant, with the only exception being the Limit Checker which due to its nature can only have one instance active.
Support for 24x7 service By allowing intra-day closing of market data by currency the need for a global EOD close is eliminated.