Americas Compression Service of the Year: TriOptima
It was another banner year for TriOptima, our Compression Service of the Year, as it set new records for reducing notional, put in place its service to deal with benchmark reform, and continued to innovate with the launch of an API for compression.
TriOptima’s core compression product, triReduce, continued to set new records in 2019. In particular in FX, with its partnership with CLS, it delivered $9.1tr of gross notional reduction in forwards from client portfolios in the year, a 71% increase on the year as more prime brokers and executing brokers submitted trades.
The last quarter of 2019 was particularly strong, with $4.9tr of reductions. While the pace dropped somewhat in early 2020, amid elevated market volatility and clients transitioning to off‑site working, reductions are still running well above the first quarter of 2019.
“We continued running all our services throughout and didn’t miss a beat,” says Phil Junod, head of triReduce and triBalance business management at TriOptima. “While compression notional dipped a little as customers were understandably being very conservative in their risk tolerances, now we are right back to where we were and everybody is playing catch-up.”
In interest rate derivatives, the big topic in 2020 and 2021 will undoubtedly be benchmark reform and the need to migrate huge volumes of OTC swap trades to alternative reference rates when Ibors are retired. TriOptima launched its solution to this in 2019, with its established triReduce compression service at the heart of it.
“There are two issues,” says Junod. “What to do with legacy swap trades in the cleared space, and then how you manage the actual risk transformation into the new indices.”
Compression cycles to reduce gross notional in legacy ICE Libor trades are the straightforward solution to the first problem, while TriOptima will deal with the second problem through the use of tolerances and by introducing risk replacement trades in the alternative reference rate. The sterling ICE Libor to Sonia transition is ahead of the curve, says Junod, but once discounting changes in dollars are introduced in October, that too should see increased momentum for other alternative reference rates.
“Sonia is a reformed rate so there is existing liquidity,” he notes. “Sofr is new so it takes time to build up liquidity, price transparency and price discovery, so I think that everyone will be watching how the process in sterling evolves.”
Last year also saw the introduction of what TriOptima calls its Low Touch Compression (LTC) service, which includes an API — the first compression service to do so — so that customers can automate the delivery and receipt of data on a schedule. LTC has full data validation, allowing the customer to identify booking errors such as an incorrectly applied fixing, and it enables the inclusion of all types of rates instruments in a single compression cycle.
“We are very conscious that everyone is under resource pressure and banks have to do more and more with less and less,” says Junod. “We are now in a position to say to clients that resource levels needn’t be an issue as we can give you the tools to fully automate the process.”
Several of TriOptima’s larger bank customers are already using the service, says Junod. “It’s taking the burden off the banks. A lot of the processes are eminently suitable to automate, so I think we will see a move away from traditional user interfaces and manual file uploads.”
While the justification might not be there for smaller banks — which TriOptima says it continues to support and which it calls an important part of the network — customers that frequently run compression cycles now have the option of automation. “It’s about making compression as low touch as possible for the largest network of clients” Junod says.
The firm’s ability to deliver across all its activities is a result of its single-minded focus on guaranteeing the integrity of the process, says Junod.
“The real differentiator is that in all of these pieces we do a full economic reconciliation that provides robustness to the cycle, and is one of the numerous validation checks we include to ensure that the data is correct and that the system is fair to all clients, so no one is disadvantaged.”