After a couple of false starts, the OTC derivatives market took its first major step towards emulating the FX and money markets (not to mention the fixed income and equity markets) with the launch of SwapsWire, a multibank platform aimed at automating much of the post-trade process. The platform is live in Europe, as well as New York – a launch in Asia is expected to take place around the end of the first quarter.
Owned by a consortium of leading banks, SwapsWire was originally intended to offer execution as well as post-trade services. However, Henry Hunter, chief marketing officer, explains that the platform’s owners felt a more urgent requirement was the provision of post-trade services. He does not rule out the inclusion of execution services at some stage in the future; however, in the near term the company will focus on widening its currency and product reach.
Sixteen banks and brokers were live on the system at time of going to press, with more being onboarded every week, according to Hunter. The platform launched with single currency interest rate swaps (IRS) in eight currencies: the US dollar, sterling, euro, Japanese yen, Swiss franc, as well as the Norwegian, Danish and Swedish crowns.
Perhaps the biggest benefit of the launch of SwapsWire is that it automates much of the documentation and confirmation processes. “In a manual environment, the execution of OTC derivative transactions is different to other OTC products in that there are no actual payments in transactions for many months,” Hunter explains. “Therefore it is important that the details are agreed early and without a potentially awkward time lag.
“Traditionally, dealers exchange and reconcile trade confirmations,” he continues, “But this is a very time intensive process, especially if there are differences between the counterparties. Assuming there are no problems, the confirmation process can take one or two days. If there are problems, the delay stretches a lot further, resulting in a degree of market risk for the parties to the trade. This is where SwapsWire steps in.”
Immediately after a trade is executed, a single copy of the trade is entered into the SwapsWire system, meaning that both parties have an identical representation of the details to review. This makes the confirmation of details much swifter, because users can populate their downstream systems much more quickly. “This is quite a change in how trades are confirmed, it is vastly more efficient,” says Hunter. “By replacing many of the manual processes associated with trade processing, with the provision of a single reference point, we are enhancing users’ trade capture abilities.”
If a trade is executed through an interdealer broker (both Icap and Prebon Yamane are using the platform, with others set to follow), the broker enters the details of the trade into SwapsWire, which presents it to the traders for their agreement. “If a trade is executed through a broker, the bank dealers will not even have to enter the details into their trade capture systems because SwapsWire does it for them,” says Hunter. “This not only allows the dealer much more time to concentrate on market issues, but back office managers are able to reallocate resources to other tasks as the manual checking process has been reduced.
“Some institutions have in the past had to limit business volumes due to procedural and control issues relating to the amount of outstanding documentation. It can be a restraint on business, but SwapsWire has removed this restriction, which for high volume players has the potential to be a huge benefit,” he adds.
SwapsWire has also improved the OTC derivative trading process by providing a central transport mechanism for data. “Data standards such as FpML are vital to the industry but they are not the answer in themselves. From a technical and logistical perspective, there needs to be a central transport mechanism in place,” says Hunter. “This is the space that SwapsWire has occupied and we intend to expand from here.
“We were facing a situation as a market wherein the brokers were considering engaging banks in STP [straight-through processing] initiatives directly,” he continues. “However, because the banks have a variety of systems, this meant the brokers would have to build interfaces into many different systems. This would have resulted in a very tangled communication web and would have entailed a huge technical effort.”
According to Hunter, SwapsWire has become a platform by which market standards can be implemented. He says that it has built upon standards issued by ISDA, for example, for components of the trade such as cash settlement clauses. “There are lots of different options for each component of a cash settlement clause that have to be documented each time,” he says. “We have implemented defaults into templates for every currency/tenor combination which means that dealers only have to alter details when they are non-standard. The cash settlement clause agreement process can be something of a nightmare, so we have brought a huge efficiency to the market by standardising these defaults.”
Another area in which the platform developers have worked hard is in the provision of a legal framework, something that can be a thorny issue in the OTC derivatives markets. Working groups developed a set of provisions and terms to which all users of SwapsWire are legally bound. Hunter acknowledges that as the platform expands its product set, its legal framework will have to expand with it. “We are very comfortable with our legal framework and are confident it can be extended into other products and currencies,” he says, “It has been designed to be extensible.”
Hunter says that the platform has been built to be scaleable, and whilst he declines to pinpoint specific areas of growth in the company’s plans – these will be decided by the ownership and users of the platform – he acknowledges that areas such as credit, commodity and equity derivatives hold a degree of interest. “Any OTC derivative is ripe for our business and technical model,” he says. “We have the expertise and technical knowledge to make expansion into other products a reality. There is, however, a strong connection between the commoditisation of a market and its suitability for online processing.”
An area the company is interested in, is further extending the post-trade automation. Hunter notes that there are currently clearing house initiatives in the financial markets, and suggests that linking SwapsWire to any of these offerings is “a realistic proposition”. He stresses that in order to ensure that SwapsWire delivers the necessary efficiencies it must remain abreast of developments and be able to link to any system in the OTC derivative space.
“Our focus is on a multi-dimensional build out,” he explains. “We can install new users onto the system in anything from six weeks to three months, depending upon the level of integration required and the level of due diligence. Our expansion is not a technical issue, rather one of coordination and implementation.
“The initial feedback to the launch has been very positive and we are looking to build on this as users become more comfortable with the technology,” he continues. “As far as our users are concerned, they are finding that it makes sense to put all of their trades through SwapsWire or none at all – there is no halfway house. We are committed to ensuring we have the highest number of users possible on the system and the early indications are that our volumes processed will be very impressive.”