Six leading derivative dealers have teamed up to form a new venture called SwapsWire.com, a communications platform that will provide a network and standard trade protocol for online trading and negotiation of interest rate derivatives contracts.
The six partner banks, Chase Manhattan Bank, CitiGroup, Deutsche Bank, JP Morgan, Morgan Stanley Dean Witter and UBS Warburg (a division of UBS AG), are now in the developmental stages of the project.
The system is due to begin pilot trading in US dollar and euro interest rate swaps internally by the fourth quarter, with plans to offer the service to the professional dealing community by the first quarter of 2001. Thereafter, the SwapsWire partners envisage extending the service to cover additional products and currencies, as well as to broaden the distribution to end-user clients. The service will provide electronic negotiation and trading from the start.
“The $83 trillion global derivatives market has not had much success in the e-commerce world,” says Gael de Boissard, managing director and head of derivatives, Europe, for JP Morgan. “The first initiatives to date have mainly been copycat versions of what has occurred in the bond and futures markets, but these have failed to reflect the nature of the OTC derivatives markets. As a consequence, they haven’t received the necessary dealer support. SwapsWire is fundamentally different in this regard.”
De Boissard adds that SwapsWire is not an interdealer brokerage, but rather it replicates the current dealing model of private negotiation between counterparties. “We fully anticipate that interdealer brokers will be a part of the system in the same way as they are today,” he says.
SwapsWire will use a “point to point” platform, whereby counterparties can privately negotiate prices, rather go to a central location or exchange. “The reality of the swaps and derivatives market is that it is highly dependent upon the credit component,” says de Boissard. “The way in which this market has evolved makes it dependent on point to point contact for pricing between dealing institutions. Not only does SwapsWire address this, but it also addresses the need for straight-through processing, flexibility and cost savings.”
“To date, the swaps market has been largely manual and people intensive,” he adds. “The opportunity to create a standard protocol is very important, as is the ability to standardise the processing that we all have – because this represents a huge piece of all of our expense bases.
With SwapsWire, we are putting the building blocks in place to deliver a network that will automate the trade execution process and allow you to deal electronically with the whole continuum of the derivatives market.”
With regard to FPML, de Boissard notes there has been an attempt to create a standard protocol for the market, but to date, nothing has been done to create an electronic standard for verifying trades. “We will to look to FPML to begin with, but do see scope for expansion,” he says.
Software development is currently being evaluated for both internal and external solutions, but at least some of the building work is likely to be outsourced to independent contractors. Costing is still under discussion, however the partners say they are “committed to keeping access costs as low as possible” to ensure broad distribution.
SwapsWire will act as a software service provider and so will not hold any data, such as charting or analysis itself, but de Boissard says that once the building blocks are in place, it will be relatively easy to develop these services using the same protocol, which the partners intend to make openly available.
The Board of Directors currently comprises one member from each of the six participating institutions. A chief executive and other officers will be appointed within upcoming months.