Quantile, a provider of portfolio optimisation services, has developed what it says is the market’s first optimised backloading service which, once FX Smart Clearing has been launched by LCH ForexClear, will allow participants to reduce margin and capital requirements by moving FX Forwards and FX Swaps into LCH ForexClear. 

FX Smart Clearing is being developed in response to the standardised approach to measuring counterparty credit risk (SA‑CCR), which has significantly increased capital requirements for banks trading FX derivatives. Due to the higher counterparty risk weighting, uncleared FX has a large capital requirement of 20-100%. By moving FX Forwards and FX Swaps into LCH ForexClear, the capital requirement materially reduces to 2%. Clearing also enables participants to benefit from greater multilateral netting, and trades are treated as settled to market (STM) which further reduces SA-CCR exposure.  

A recent Proof of Concept (PoC) with LCH ForexClear generated a compelling case for Quantile’s optimised backloading service and FX Smart Clearing, with 10 participating banks achieving an average reduction in capital requirements of 38% (10 entities) and 50% (21 entities).

Once live, the service will follow Quantile’s established optimisation process. Participants would choose their optimisation objectives and constraints, and Quantile’s advanced algorithms would select which trades to backload while also generating new risk overlay trades which reduce financial resource requirements. The resulting FX Forwards portfolio would then be submitted to LCH ForexClear to clear on behalf of its members.