New Straight-Through Trades Highlight Swap Clearing Appeal
09 Aprile 2010 - 7:57PM
Dow Jones News
A pair of recent trades may offer early indications customers of
big banks are warming to the idea of backing their swap trades
through new clearinghouse services.
Electronic market operator TradeWeb on Tuesday said it had
cleared the first customer interest-rate swap trade executed on its
electronic platform, days after Deutsche Bank (DB, DBK.XE) reported
clearing a similar transaction on its own platform.
The twin trades may provide evidence that amid the regulatory
clamor for over-the-counter derivatives to be shunted to exchanges
and clearinghouses, the profit motive may be a more powerful
driver.
Moving away from negotiating trades on the phone and then
entering them manually in computer systems helps to streamline back
offices and eliminate errors.
Clearing--the process in which a central counterparty stands
between every trade to reduce the risk if one side defaults--is key
to regulators' plans to revamp rules for off-exchange markets
including interest-rate swaps and credit derivatives.
Dealers have been moving toward clearing for years, with
regulatory requirements to do so now being shaped in the U.S. and
Europe.
Some customers trading swaps with the banks have resisted the
idea of a regulatory mandate to clear their business, citing costs
associated with posting collateral for trades.
But as clearinghouse operators expand their services to
so-called "buy-side" participants such as hedge funds, asset
managers and corporations, some are becoming curious.
"We're finding that [clearing] is one of the top-level
conversations we're having at all levels with our clients. People
want to talk about it and understand what's required to connect,"
said Serge Marston, head of e-commerce business development for
Deutsche Bank.
Last week Deutsche Bank had its first set of interest-rate swap
transactions executed through its electronic trading platform
Autobahn and cleared via dbClear, which acts as a pipeline to
derivatives clearinghouses like London-based LCH.Clearnet.
"From Deutsche Bank's perspective, our view is that clearing
needs to be an intrinsic part of our offering to clients," Marston
said.
Deutsche Bank estimates that 65% of customer business in the
interest-rate swap market could be cleared if authorities require
standardized contracts to be backed up. But even without a mandate,
the firm sees a "large amount" of interest in the service.
Tradeweb Chief Executive Lee Olesky said that swap buyers like
asset managers and insurance companies will gravitate toward the
price transparency and risk reduction offered by electronic trading
and clearing.
"I think you'll have a much stronger system," he said.
Tradeweb, which facilitates electronic trading of derivatives
through a multi-dealer auction system, has seen more than $5
trillion in interest-rate swaps change hands on its platform since
2005.
Adding clearing links to LCH.Clearnet and platforms operated by
IntercontinentalExchange Inc. (ICE), CME Group Inc. (CME) and
Nasdaq OMX Group Inc. (NDAQ) will fuel further automated trading of
interest-rate and credit default swaps at Tradeweb, Olesky
said.
Joel Telpner, a structured finance partner at law firm Jones
Day, said that the buy side remains "haunted" by the downfall of
Lehman Bros. Holdings (LEHMQ) in 2008, as a result of which many
firms' collateral were tied up in lengthy bankruptcy proceedings.
Some of that could have been avoided by clearing swap transactions
done with the bank, he said.
"The more that it's feasible for smaller and mid-sized buyside
players to access these markets without having to invest a lot of
money in either hardware infrastructure or hiring a lot of
additional people, [the more] that facilitates and eases the
movement toward clearing," Telpner said.
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117;
jacob.bunge@dowjones.com
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