October 17, 2016

Eva Szalay, FX-Week

The change in risk perceptions since January 2015 has led to a heightened focus on risk management and a desire on the part of prime brokers to have as much control over the infrastructure as possible, including the use of tools that allow them to monitor clients and ensure they stay within their allocated limits at all times.

One such product is Traiana’s CreditLink, a credit-monitoring tool for prime brokers and executing brokers, which monitors overall credit lines, as well as carve-outs to different venues. It allows prime brokers to cut off clients who go above their limits.

“We help prime brokers solve the challenge of monitoring their credit lines and carve-outs, and have built automatic kill switches as a first step,” says Jill Sigelbaum, global head of foreign exchange at Traiana.

One of the building blocks of the kill switch is Traiana’s Designation Notice Manager (DNM), which allows prime brokers to cut clients off from further trades with a termination notice pushed out to executing brokers at a single keystroke, rather than using manual and time-consuming methods.

“The DNM tool creates legally binding credit limits between counterparties and is different from a circuit breaker, because it allows parties to legally terminate trading with the client. The DNM eliminates manually managed limits and lengthy time delays, and excess risk for the prime broker. This enables prime brokers to ensure clients stay within the overall credit limit in a highly fragmented environment,” Sigelbaum says.

The kill switch is connected to nine ECNs, six of whom already have the ability to consume changes in credit, while the other three are working on technology upgrades.

Credit-rebalancing tool

As the next step, Traiana will release a credit-rebalancing tool in the first half of 2017, which will enable dynamic allocation of credit to venues where the client is trading. Currently, prime brokers allocate slices of clients’ overall line on the number of venues they want to trade on, but they do not have the ability to move credit from one platform to another if there is excess available on the one and a shortage on the other.

“The ability to exploit efficiencies allowed by dynamic reallocation will give prime brokers more comfort, leading to more credit availability in the market as a whole. For example, if a client goes short on one venue, but goes long with an equally but opposite trade on another, from a prime broker’s point of view, the overall credit utilisation doesn’t change,” says Sigelbaum.

The manual credit-distribution tool launches this year, while the automated rebalancer will go live in the first half of 2017.

“If a client exceeds their limit, the prime brokers will be able to switch off their trading lines via CreditLink by using the DNM tool to generate a legal termination notice and the kill switches to pause trading on ECNs. There is no way they can do this today, and both the prime broker and the executing broker take on extra risk as a result of the current inefficient processes,” says Sigelbaum.

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