NEW YORK & LONDON--(EON: Enhanced Online News)--The CFTC rule requiring the registration of new swap trading venue operators is expected to go live tomorrow, October 2. Despite the possibility of a delay, buy-side firms tell TABB Group they have turned their attention to workflow challenges related to swaps execution, specifically, trade terminations and compactions.
“As a natural extension of bilateral compaction, central clearing compression cycles can significantly reduce risk in the global derivatives marketplace, which after all is the goal of the Dodd-Frank Act in the first place”
Central clearing of swaps comes with an unpleasant side effect, line-item proliferation, the paradox of trading swaps in a centrally-cleared world, in that it takes two trades to effect a termination. But according to new research, “Swap Terminator: A Central Clearing Solution,” written by TABB’s director of fixed income research, Will Rhode – who spoke with 12 buy-side firms, with a combined total of $7.7 trillion in AuM, asking about their workflow challenges of trading swaps in a centrally-cleared environment / SEF environment – what the buy side needs is a system that can communicate with clearinghouses agnostically, drawing down pre-existing swaps allowing the necessary data fields for offsetting trades to be auto-filled and the termination process executed, netted and settled in real time.
Terminations and expirations have been on the increase at CCPs, with daily volume growth picking up exponentially throughout the year, at times exceeding $1.8 trillion in a single day at LCH.Clearnet’s Swapclear. Compaction is a pre-cursor to central-clearing compression, an important tool as long ago as 2003 in reducing the overall size of the global swaps market, with its attendant operational and systemic risks. However, it has taken dealers many years of terminating and compacting swaps between each other bilaterally before they started to centrally clear and, later to compress their trades at the clearinghouse.
Compression, which evolved as a method to allow a dealer to consolidate its portfolio of bi-lateral swaps without needing to negotiate individual tear-ups with multiple bilateral counterparties, is an approach adopted by TriOptima in its triReduce service. Since 2003, it has eliminated more than $245 trillion in interest rate swaps (IRS) and $77 trillion in credit default swaps (CDS).
Although few solutions are available currently that can standardize the process across multiple central counterparty clearinghouses (CCPs), TABB believes the use of termination tools is set to grow, such as offered by TrueEX, which developed a portfolio terminations and compactions (PTC) platform to help asset managers manage trade terminations, compactions and portfolio rebalances – transferring a swap from one fund to another – in a centrally-cleared environment, similar to what TriOptima pioneered.
As firms trading equities and futures have learned, workflow tools are critical entry points to the execution process. The benefit of automated workflow tools is that they deliver the certainty, clarity and comfort of straight-through-processing (STP) in a centrally-cleared world, as well as increased safety. “As a natural extension of bilateral compaction, central clearing compression cycles can significantly reduce risk in the global derivatives marketplace, which after all is the goal of the Dodd-Frank Act in the first place,” says Rhode.
The 12-page report with 9 exhibits is available for download by TABB Group Research Alliance Fixed Income clients and pre-qualified media at http://www.tabbgroup.com/Login.aspx. For a copy of the Executive Summary or more information, visit www.tabbgroup.com. To purchase the report, write to firstname.lastname@example.org.
About TABB Group
Based in New York and London, TABB is the only research and consulting firm focused exclusively on capital markets, based on the interview-based, “first-person knowledge” research methodology developed by Larry Tabb. For more information, visit www.tabbgroup.com. In 2010, TABB launched TabbFORUM, the online capital markets community for peer-to-peer opinion and analysis covering current industry issues, tracked daily by 18,000-plus professionals.