The Problem: Market Risk Challenges in Securities Finance

Market risk professionals operating in securities finance face significant challenges when managing Total Return Swaps (TRS). Regulatory frameworks like Basel III impose stringent capital charges on Level 3 assets due to their illiquidity and valuation complexities. This directly impacts the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), making it costly for banks to hold these assets.

At the end of 2024, market participants witnessed the real-world impact of these regulations, as firms struggled to efficiently reclassify TRS into more favourable liquidity profiles. Many financial institutions were forced to hold excessive capital and liquidity reserves due to reliance on outdated or insufficient market data, restricting their ability to allocate resources efficiently.

Introducing Wematch “Data + Contribution”: A Game-Changing Solution for TRS Liquidity and Classification

Wematch’s D&C product is transforming the way financial institutions approach TRS liquidity and classification. By leveraging cutting-edge data aggregation and analytics, Wematch D&C provides a more precise and dynamic view of TRS valuation and liquidity. The result? Banks and financial institutions can optimise their capital efficiency while meeting regulatory requirements.

Key Benefits of Wematch D&C

1. Enhanced Valuation Precision: Wematch D&C provides accurate, real-time pricing for OTC instruments, allowing banks to assess the liquidity and value of their Level 3 assets with greater confidence. This eliminates reliance on static or outdated models, reducing unnecessary capital burdens.

2. Reduction in Illiquidity Premiums: By improving transparency and price discovery, Wematch D&C helps firms challenge illiquidity assumptions. This allows certain TRS positions to be considered for reclassification from Level 3 to Level 2B or even Level 2A, significantly lowering capital charges.

3. Improved Asset Classification & Capital Efficiency: Wematch D&C provides the data-driven evidence required to support asset reclassification efforts. This not only reduces regulatory costs but also enhances capital allocation, freeing up liquidity for revenue-generating activities.

Real-World Impact: How Banks Benefit

• Lower Capital Buffers: Banks can reduce the amount of capital tied up in excessive liquidity reserves, allowing more efficient capital deployment.
• Optimised Return on Equity (ROE): By reducing the capital burden of Level 3 holdings, financial institutions can achieve improved returns and drive profitability.
• Regulatory Compliance & Risk Management: Wematch D&C aligns with evolving regulatory expectations, ensuring firms maintain compliance while optimising risk-weighted asset (RWA) management.

Expanding Into Equity Repo and Collateral Trading

Building on the success of D&C on Total Return Swaps (TRS), Wematch is extending its capabilities into Equity Repo and Collateral Trading. These expansions will further enhance liquidity management and capital efficiency across a broader range of securities finance instruments.

Next steps…

By leveraging Wematch D&C, market risk professionals can make more informed decisions, reduce unnecessary capital charges, and enhance their institution’s financial performance. Don’t let outdated data restrict your liquidity – let Wematch D&C help you unlock new opportunities with your institution’s capital efficiency.

Interested?  Speak to our team today.