LONDON, Nov 22 (IFR) - Uncleared swaps are set to move step closer to their more efficient, centrally-cleared counterparts following the launch by swap exchange operator trueEX of the first venue for real-time execution of the products.
The new platform aims to improve transparency and deliver efficiency savings in the face of new rules that require OTC trades to be backed by collateral if they are not cleared by central counterparties. Clients will be able to co-mingle uncleared interest rate swaps with cleared swaps that are traded on the trueEX swap execution facility, which has attracted 80 buyside firms and around 20 dealers.
“Execution of uncleared swaps has become very cumbersome and painful for clients as a result of new margin rules, but the market still matters as you have legacy portfolios and exemptions as well as products, currencies and jurisdictions that are not clearable,” said Sunil Hirani, trueEX CEO.
According to a recent study from the Bank for International Settlements, uncleared interest rate derivatives contracts total more than US$100trn in gross notional outstanding and represent 25% of the total market for OTC interest rate derivatives.
“With the new platform, clients can enjoy the same benefits they’re getting on the cleared platform such as automation, operational efficiency, better pricing and best execution,” said Hirani.
New margin rules implemented in the US, Canada and Japan, and set to go live in Europe in early 2017, have brought additional complexity to uncleared swaps trades. Participants are required to contact dealers for pricing and collect information around credit support annexes ahead of every trade.
The latest development provides a standardised electronic protocol to communicate trade information, pricing, CSA details and margin payments. Enabling real time execution, processing and novation, the platform responds to buyside calls for lower trading costs and a reduction in operational risk associated with manual processing.
“Introducing much needed efficiencies, automation and scale for non-cleared derivatives helps all market participants adjust to margin, capital and regulatory changes that are taking place,” said Ken Lester, managing director at NISA Investment Advisors, a fixed income and derivatives asset manager.
“We are very pleased that innovative firms like trueEX are responding to pressing needs in the fixed-income markets.”
He said that the development also lays the foundation for improvements in other non-cleared products such as swaptions, total return swaps and repo markets. Four currencies are included at launch and the initial focus will be on expanding the currency base.
Although trueEX will become the first venue to offer trading of uncleared contracts alongside cleared trades, efforts are ongoing elsewhere to bridge the gap between the two markets and align efficiencies. Earlier this month, LCH SwapClear took its first steps outside of the cleared world with the launch of SwapAgent, a service designed to increase standardisation, efficiency and simplicity in the bilateral derivatives market.
For SEF operators, the uncleared market may offer greater opportunities than its cleared counterpart as they seek to increase market share. Under Dodd-Frank rules, swaps mandated for clearing must be submitted for mandatory execution on registered venues once they are made available to trade. Through the MAT process, penned by the CFTC, platforms have been reluctant to launch new products that would ultimately be forced into the execution mandate, for fear of a market backlash.
“There’s a lot of flexibility in the non-cleared market as you don’t have mandated execution,” said Hirani. “We see uncleared swaps as crucial from a market share perspective, both in acquiring new clients and acquiring new depths with our existing clients.”
On its registered SEF, trueEX has executed over US$2.8trn of interest rate swaps trades and US$14trn in post-trade services such as compression trades. In October, the platform accounted for over 20% of dealer-to-client volumes, a five-fold market share increase over the previous six months. (Reporting by Helen Bartholomew; Editing by Ian Edmondson)