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Global Compression Service of the Year — Quantile

By GlobalCapital
23 Sep 2020

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After a record breaking year in which Quantile grew its core business and evolved its offering to meet clients’ needs amid a shifting regulatory backdrop, Quantile is Global Capital’s Global Compression Service of the Year.

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Quantile was formed five years ago by CEO Andrew Williams and chairman Stephen O’Connor to help banks rebalance and reduce their counterparty risk, increase the efficiency and liquidity of markets, improve returns for clients and make the financial system safer.

The company offers two services: margin optimisation and interest rate compression. The optimisation service is designed to reduce counterparty risk and the costs associated with initial margin. It works by analysing the risk of transactions between participants and generating new trades that have neutral market risk that release capital. Quantile’s compression service eliminates on average more than $10tr by gross notional of over-the-counter trades each month by unwinding existing trades and rebuilding the risk position using standardised hedges, thereby reducing gross notional and standardising remaining positions. 

The past year has been one of record breaking success for Quantile as it grew its core services. It has compressed more than $200tr of notional to date, with $100tr done in 2019 alone. It regularly achieves the largest compression runs at LCH and has executed the largest euro and dollar compression runs since regulatory reporting of compression activities began in January 2018. 

“We have 35 clients live with our LCH compression service,” says O’Connor. “We started this business by building a critical mass of the G15 banks and now we are expanding the service to regional banks and institutional market participants globally.”

In 2019 it extended its geographic reach by opening a New York office, with new European headquarters to follow next year in Amsterdam along with a Japanese operation to complement an extension in venue coverage at Japan Securities Clearing Corporation.

Despite its growth, Quantile, which employs around 60 people, retains the ethos and innovative approach of a start-up, forming tight working groups with clients in order to develop new products, while its technology platform allows for fast and scalable implementation. 

“We’re a young company, so we built everything from scratch straight into AWS [Amazon Web Services],” explains Williams. “All of our infrastructure is built in the cloud which has helped us scale as we’ve grown and, more recently, enabled us to transition to working from home.” 

During the peak in market volatility in March, Quantile experienced a drop-off in volumes as clients adjusted to new ways of working under lockdown. But business bounced back in dramatic fashion. “A backlog built up that made April one of the largest months for our business,” says Williams. “We executed two of the biggest runs to date: a dollar run reducing $7.2tr, and a euro run reducing $4.7tr.” 

In 2020, the company expanded its offering beyond its core margin optimisation and trade compression services. “We are evolving compression beyond reducing trading costs and notional to help banks increase efficiency and clean up their books,” says Williams.

Its efforts have focused along three lines. It has helped its clients with the transition from Libor to risk-free rates by adding new alternative benchmark trades as risk replacements, resulting in “notionally-efficient” portfolios backed by risk-free rates. Quantile supports alternative indexes for all G3 currencies, including Sofr for dollars, €STR for euros and Sonia in sterling.

“We’ve been at the forefront of adapting our service to the new regulatory environment,” says O’Connor. 

Its compression and risk rebalancing runs will soon be compatible with the new standardised approach to counterparty credit risk (SA-CCR), offering a “forward optimisation” of exposures that can be tailored to an individual client’s go-live date.

It is also the only provider that is working to optimise reset risk within the compression process. “In doing so, we can deliver superior compression performance and enhanced risk reduction,” says Williams. “By intelligently widening reset constraints, participants can expect improved notional efficiency of up to 30%. 

“Other processes add forward rate agreements to hedge reset risk, which are not compatible with risk-free rates and do not compress efficiently with the swaps they are hedging. At Quantile, we’re working on better utilising the existing trades to hedge reset risk, which is more efficient than adding new trades, both today and in the future risk-free rate world.”

By GlobalCapital
23 Sep 2020