Digital Vega, the FX option multi-dealer platform (MDP) founded by Mark Suter, has become the first FX derivatives trading venue to join Traiana’s Harmony CreditLink service, which provides real-time monitoring of counterparty trading limits and risk management.
CreditLink, which was started by Traiana in June for spot contracts, has been enhanced to include pre- and post-trade credit and risk-management services for FX derivatives, which have traditionally been traded by phone rather than electronically.
In EuromoneyFXNews’s recent e-trading survey, 47% of trading still takes place over the phone, compared with just 18% in the spot market.
Trading of options on MDPs is a relatively new development in the FX markets, and looks set to grow rapidly to meet new regulatory requirements - under the Dodd-Frank Act in the US, and EMIR in Europe – which require that options must be traded on multi-dealer trading venues and must be settled through a clearing house.
For spot markets, CreditLink allows counterparties and prime brokers to calculate net positions, provides post-trade limit checks and sends alerts on limit breaches when they trade electronically. However, in the options market, prime brokers have been less keen on clients trading on option platforms without more rigorous controls, given the level of complexity with the product. Digital Vega’s Medusa platform, is the first option platform to address these issues.
“Integrating the Medusa trading platform to Traiana’s CreditLink solution brings a range of significant advantages to all our clients and partners in terms of managing counterparty risk and exposure,” says Suter.
With CreditLink, when a client hits the submit button to execute a trade, a counterparty will be able to check to see if that increases or decreases the risk, and whether it breaches limits, in real time. It also allows participants to monitor the limits down to client sub accounts.
That means platform providers can “white label” their platforms, and brokers can give this out to all their end-clients and monitor each of those clients individually, for their limit on an individual basis and on an aggregated basis. Furthermore, the service also extends monitoring of prime broker-executing bank limits.
In the short term, it is hoped that the adoption of CreditLink will provide a lot more comfort to prime brokers, who will give bigger limits and allow buy-side clients to trade more, thus increasing liquidity and turnover.
Furthermore, as the market moves closer to implementation of the new regulations, many have been concerned it could result in several disparate groups of clients, SEFs, exchanges, clearers and executing banks, who aren’t connected from an operational and risk-management perspective. According to Suter, CreditLink is the ideal solution to that connection issue.
“The moment this stuff becomes law, when someone logs on to our platform, there will be pre-allocated limits in place,” he says. “The thing that was holding it up [option trading on MDPs] was credit, and we’ve addressed that.”