Compression & Optimisation
We implement and automate compression and optimisation processes to drive operational efficiency for financial institutions.
What is Compression?
When trading derivatives, firms must closely manage their capital risk positions and margins due to regulation such as:
- Basel III Risk Weighted Assets
- Basel III Leverage
These regulations dictate the amount of regulatory capital banks are required to hold, the amount of leverage they can take, and the Exposure at Default a bank can have against a given counterparty.
Compression activities seek to minimise the amount of regulatory capital required to cover a bank’s derivative positions without changing the positions’ risk profile. This allows for a bank to provide better liquidity to their clients and is crucial for a bank’s competitive position.
How is this done?
At any time, a Bank will have a large number of trades in both directions with multiple parties, leaving the gross trading position disconnected from the net risk position, in turn requiring the Bank to keep more capital in reserve to cover their net risk position.
The offsetting of trading activity can be collapsed on a multilateral basis and will leave each bank with a smaller set of gross trades that represent the same net risk position, but with lower gross trades, lower capital requirements.
The Challenge and the Opportunity?
Compression is not new. It has been a core activity for more than 10 years in many institutions. However, in most Banks, there still exists manual processes to complete compression and optimisation runs. This creates an expensive operational overhead and reduces the number of actionable opportunities.
Our market analysis suggests the opportunity that exists from seamless vendor / client integration and further automation could lead to both annual operating efficiency and in more actionable opportunities across the network. This is done by:
Business Case to Implementation: Proposed Solution
Within each client organisation there are individual considerations to achieve optimal success. Brickendon has developed a three phase approach for to identify the opportunity, validate transformation funding requirements and reach the end state:
- Quantify cost saving opportunities & gains
- Evaluate the operational cost
- Target most optimal scenarios
The opportunity: To achieve material cost reductions stemming from current inefficiencies and increase the scope and frequency of compression / optimisation activities offered to clients.
We will produce a roadmap to a clearly defined optimal scenario that takes into account all individual circumstances.
- What is the optimal approach (scope and frequency) for compression (i.e. how much more regulatory capital can clients be saving)?
- How much overhead cost would be saved?
- What is the operational and technical cost associated with implementing the systems, processes and controls required for the optimal scenario?
The challenge: We need to ensure that all stakeholders are aware, incentivised, and understand the benefits stemming from the proposed changes required to achieve the optimal scenario.
- How will the necessary connections with Banks be made?
- How can we validate the standardised workflow and processes across all network participants?
- How can we build the necessary components and link everything together in order to achieve a fully automated and seamless process?
- The target architecture
- Implementation POCs
- The delivery roadmap
The architecture: This is where we articulate how to achieve your goals. Architecture is not limited to IT systems as process engineering is as important, if not more important. It is therefore the combination of the two that will be tackled in this phase.
- Tailor the process flow and the technology framework.
- Identify the components that need to be upgraded and/or built.
- Cost the components to implement.
- Identify ongoing staffing and other requirements.
- Refined processes
- Built components and/or managed services.
- Full vendor integration
The Implementation: Each client poses a unique set of characteristics and integration requirements. To maximise clients’ opportunities, we often develop customised tools in addition to managing change within the organisation.
- Manage change of internal processes and integrate operational silos.
- Deliver the technology through state of the art practices.
- Report and quantify the outcome in order to monitor and constantly tune the success.
- Handover into BAU and/or offer functionality as a Managed Service.
Relevant Case Studies & Insights
The Process for Optimisation – Banking
Where compression seeks to offset economically similar trades to reduce notional, optimisation seeks to free up...Read More
An Analysis on the Different Capital Constraints Faced by Banks
A more sophisticated methodology has been introduced for calculating capital requirements with the aim of better...Read More