The Client

A multinational commodities trading house with a global client base.

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Background

As a growing commodities broker, our client has a rapidly increasing commodities derivatives book, across uncleared and cleared markets.

The greenfield implementation of a new XVA function has become a critical business priority to effectively manage counterparty risk and funding demands, necessary to deliver growth objectives in a controlled manner.

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The Challenge

Increased volatility in the commodity markets, including as a result of the recent Ukraine crisis, has driven the need to implement robust risk mitigation controls to manage risk both in the current state and to support future volumes and product growth.

Higher collateral funding costs – triggered by increasing global interest rate trends - require upfront visibility of the credit and funding impact of proposed trades, to drive trade pricing, counterparty profitability and pre-trade decision-making.

With no existing XVA capability, our client required Tonic to define and implement an end-to-end XVA target operating model (TOM).

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The Engagement

The initial priority was for Tonic to perform a detailed ‘XVA Health Check’ analysis on the client’s current trade portfolio and risk operating model, while providing education and training on XVA best practice.

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Health Check Analysis:

·       Current state analysis

·       Immediate hedge recommendations

·       XVA training and guides

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TOM Definition:

Tonic has since followed a highly-structured, sequential approach to define the XVA TOM, driven by our TonicX transformation methodology.

·       XVA business objectives

·       XVA strategy definition

·       Business requirements

·       Vendor RFI/RFP

·       Vendor selection

·       TOM definition

Tonic has since defined a customised, end-to-end XVA TOM, to lay a detailed blueprint for the new XVA function, that considers:

·       Current and future trading strategy

·       Client demographic

·       Organisational footprint

·       Technology & data capabilities 

·       Industry best practices

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The Outcome

Tonic are now leading the front-to-back implementation of the new XVA TOM, across:

·       Technology

The XVA solution requires the onboarding and integration of a new vendor system as well as the upgrade/enhancement of a number of existing systems across the derivative infrastructure.  

·       Data

The XVA process introduces several new data demands on the client, including the need for additional market and reference data to support the new up-front trade pricing process. Downstream data needs must also be delivered to meet new stakeholder requirements and reporting obligations.

·       Process

Define and implement the operational processes that the XVA function will require across the end-to-end trade lifecycle, including the documentation of processes, policies and ensuring operational readiness across all teams.

·       People

Define and document the roles and responsibilities of the new XVA function and supporting teams. Recruitment of new personnel and targeted training across all functions in advance of go-live.

·      Governance

Design and establish the appropriate controls and MI that will ensure appropriate oversight of XVA function. Performance monitoring is critical to ensuring that the XVA practice continues to meet the client goals and identify any required enhancements.

In parallel, Tonic is also implementing CDS trading capability, for our client to fully execute their XVA strategy.

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Client Feedback

“Tonic went above and beyond to meet our needs. We were truly impressed with their professionalism and the quality of the work they produced”.

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