Andrew Williams

Quantile: Talking to a remarkable multilateral optimisation service provider which is looking to reduce the size, risk and complexity of the derivatives market.

May 2023 in Supplements

Quantile, now part of London Stock Exchange Group, is a market-leading optimisation provider that reduces counterparty risk, notional and capital requirements to increase the efficiency and liquidity of derivatives markets, improve returns for clients, and make the financial system safer. We asked the firm’s CEO, Andrew Williams, to tell more about the products and services this innovative and fast growing company offers, especially for FX.

Andrew, what types of firms are part of Quantile’s extensive optimisation network and what challenges are you helping them to deal with?

Since launching our first services in 2017, we’ve built a really solid network of participants globally, including all of the largest dealer banks, plus many regional banks, buy-side firms and other large institutional participants. We’re also increasingly working with clearing brokers / FCMs so we can reach more participants and increase the network effect of the services.

We founded Quantile to help manage counterparty risk and steer the industry towards a healthy steady state. It can be challenging for participants to juggle regulatory obligations, such as IM, and capital requirements, such as SA-CCR, with delivering healthy returns – we help by reducing risk and optimising portfolios so they are easier, and cheaper, to maintain.

Please tell us about the key services that Quantile offers?

We currently offer three key services at Quantile, with more innovations in the pipeline.

The first is our multilateral interest rate compression service which reduces gross notional and trade count while preserving the risk profile and valuation of a portfolio. It cleans portfolios to make them more efficient – and frees up valuable capital that would otherwise be held unnecessarily.

The second is where we’re working with a lot of FX market participants – our counterparty risk optimisation service. This service simultaneously reduces cleared and uncleared initial margin and risk-based capital requirements under SA-CCR and IMM.

Finally, we’ve been working closely with LCH ForexClear to deliver an FX Optimised Backloading service that facilitates Smart Clearing. The service will enable participants to selectively move existing uncleared trades and risk into the clearing house which optimises financial resources, including IM and capital.

How does Quantile’s multilateral counterparty risk optimisation service actually work?

The service works by analysing the risk of transactions between participants and rebalancing portfolios with new market risk neutral trades. Participants upload their data via API or our portal and set their constraints, which allows them to tailor the optimisation objective. We then run our algorithms and generate an optimisation proposal which contains the set of new market risk neutral trades. The proposal is then validated and accepted by participants and the new rebalancing trades are booked, thereby reducing counterparty risk, capital requirements and the cost of funding IM.

The service is multilateral and has a network effect. We’ve already delivered several record-breaking IM runs – and results will continue to improve as the network grows.

Why has Quantile been seeing increased demand for its Counterparty Risk Optimisation service and what sort of reductions in FX have you been delivering?

Demand for the service has pretty consistently increased since launch. Things like increasing margin costs and heightened counterparty risk during periods of market volatility tend to increase participation, but overall we’ve experienced consistent growth. We’re seeing a lot more demand from buy-side firms and regional banks as they look to mitigate the impact of the uncleared margin rules, and since new capital requirements have come into force, we’ve also seen more participants adopt the capital component of the service which can target SA-CCR, IMM and large exposures. We see this as a big area of focus going forward.

In terms of reductions – we often reduce margin and capital requirements for FX participants in excess of 50% and have delivered what we believe to be the market’s largest IM runs for FX.

Prolonged periods of extreme volatility after the initial outbreak of covid in 2020 put the spotlight on collateral and margin optimisation. Is that still the focus today?

Regulatory initial margin isn’t going anywhere and as demonstrated in ISDA’s latest Margin Survey, margin postings continue to rise. So margin optimisation will continue to be a key optimisation objective for Quantile and participants globally. However, we’re looking at the broader picture which includes the impact of capital and the cost of maintaining portfolios. A really impactful way to reduce funding costs and improve efficiency is to move risk into the clearing house or hold uncleared risk at SwapAgent. Participants can then access greater netting opportunities, reduce their risk and capital requirements and benefit from standardised infrastructure and processing. Our optimisation runs can sweep risk into these venues today, and we expect more participants to leverage this functionality within our services going forward.

Quantile pioneered multilateral initial margin optimisation for FX in 2017. What steps have you been taking to enhance your multilateral services to make post trade risk reduction even more efficient?

We built our processes to be very operationally efficient and our runs take place during the day within a five hour window. We have all the necessary third-party connectivity (such as obtaining data directly from Acadia) and support STP trade booking. We also offer an API, which can automate the entire run process from sign-up to signoff, removing unnecessary manual intervention.

To ensure the optimisation results continue to increase, we are focused on extending the network by onboarding new participants.

How excited are you about the opportunities that the FX market presents for Quantile over the next few years?

Given the importance and size of the global FX market, we believe it’s essential that participants have access to services that can help to reduce unnecessary counterparty risk and the associated costs to create more efficient portfolios, increase returns and reduce systemic risk. We started that journey back in 2017 but there is much more that can be done.

We’re very excited by the role we can play working with our clients to deliver solutions that tackle these challenges and see huge potential for future innovation as the FX landscape and regulatory requirements evolve. We’re also excited by the opportunities to work with our colleagues in LSEG to deliver solutions that work across both cleared and uncleared portfolios, such as the Smart Clearing initiative with LCH ForexClear and LCH SwapAgent.