LSEG Unveils FX Options Market Risk Optimisation Service

Things continue to move in the FX options workflow world, just a week after Capitolis unveiled a new STP service for FX options novations, LSEG’s Post Trade Solutions group has unveiled its Market Risk Optimisation service, which is integrated with its FXall platform.

LSEG says the service has gone live following a successful proof of concept involving 13 sell side FX options desks, which saw them able to trade in and out of market risk using the firm’s optimisation technology, originally launched by Quantile in 2017. The launch increases liquidity, and reduces transaction costs, LSEG says, by unlocking trading opportunities that are not easily accessible via normal execution methods.

The multilateral process works by analysing all participant axes across a range of tenors and risks and proposing an optimised set of trades within the client’s specified constraints. Pricing and risk analytics within the service are powered by the Open Source Risk Engine (ORE), a framework built on QuantLib, providing valuation and risk measures for FX options and other derivatives.

LSEG says the service builds on the initial Quantile model that optimised cleared and uncleared margin by shiftings the focus to market risk by optimising a set of risk axes chosen by traders, rather than the predefined counterparty metrics. The multilateral service works by capturing constraints and risk axes from participants, delivering a hedge proposal that optimally puts participants into their desired risk positions at the best price, then automating the trade booking process.

The firm says the end-to-end process aims to complete within 30 minutes, and can run at any frequency the market demands, making it highly responsive to market conditions.

The integration with FXall is designed, LSEG says, to provide seamless execution and straight-through processing, reducing operational risk and enhancing efficiency in the FX options market.

“Since launch, our optimisation runs have helped to reduce resource requirements, with a focus on counterparty risk,” says Andrew Williams, CEO, Post Trade Solutions, LSEG. “The next logical step in the evolution of our services is to use optimisation to reduce market risk. Our new service helps traders efficiently trade out of market risk and reduces transaction costs, which improves liquidity and leads to smoother functioning markets.

“FX options was an obvious asset class to target at launch, since its complexity and liquidity lends itself to optimisation,” he continues. “The front-office have been very receptive to the new service, and we look forward to working with new and existing clients as we evolve in line with market requirements.”