Buy and Sell Side Firms Terminate Swap Positions via TrueEX's Platform

TrueEX, a regulated derivatives platform, said yesterday that it has executed its first portfolio termination and compaction (PTC) trades in interest rate swaps with Alliance Bernstein, JP Morgan, MKP Capital and Societe Generale on its swap execution facility.

The news is a sign that value-added tools can solve a problem for buy side firms that need to terminate swap contracts.

PTC is an automated platform built by TrueEX to address the needs of clients that need to terminate, compact, back-load and allocate cleared swaps with direct and live connectivity to both CME Clearing and LCH.Clearnet. The offering helps expedite the compression of trades and netting of risk at the clearinghouse.

“It’s a process that is very manual, cumbersome and painful and it’s done on phones and spreadsheets and it’s not directly connected to the clearing houses,” said Sunil Hirani, CEO of TrueEX in an interview.

Under the 2010 Dodd-Frank Act, most swaps need to be executed on either exchanges or a swap execution facility (SEF). Swap traders have been seeking help with exiting swap positions, according to a Bloomberg News story. “Investors who want to terminate a contract that is no longer the most actively traded, such as a five year interest-rate swap that has three-and-a-half years left before expiration, are required to use those systems rather than negotiate a price directly with dealers as they typically would,” reported Bloomberg News in March.

This pertains to pre-existing cleared trades that the buy side wants to terminate at the clearinghouse. The process is needed because a firm’s asset liability mix can change and this creates the opportunity for them to move things around, said Hirani. For instance, with a manual process, prone to operational risk firms may not get the trades properly in the right accounts, cautioned Hirani.

TrueEX built the PTC functionality to enable the buy side and the dealers to automate and standardize the process and to create a workflow around terminating cleared trades and to do it in an environment that is directly connected to CME and LCH,” explained Hirani.

The PTC offering has become the most popular feature drawing both buy and sell side clients to TrueEX’s SEF, according to Hirani. Unlike other aspects of the SEF regulatory process, such as the industry debate around the so-called ‘made available to trade’ submissions, “PTC is not controversial. It helps with the operations, the buy side like it and the dealers like it,” said Hirani.

“Asset managers such as AllianceBernstein need automated platforms like TrueEX with direct connectivity to clearing firms (FCMs), swap data repositories (SDRs) and clearinghouses (CCPs) to help execute cleared terminations,” commented Matthew Scott, a trader at money manger Alliance Bernstein in the release. “The current process is manual, prone to operational risk and can take hours —all of this is reduced to minutes with direct CCP connectivity with full straight through Processing (STP) benefits being provided to the buy side,” Scott added.

One of the key features is direct connectivity to clearinghouses, which eliminates the need for middleware. “The goal of this product is to create operational efficiencies as these trades are touching different FCMs and CCPs. It’s hooked directly to CCPs and it doesn’t require legacy middleware providers,” said Hirani in the interview. Hirani said that PTC appeals to a diverse set of market participants. With the opening up of the cleared derivatives markets to more participants, hedge funds and asset managers as well as FCMs will seek to leverage the economies of scale of platforms provided by TrueEx to terminate and compact cleared trades.

“SG has been an early adopter of innovative technology solutions like TrueEX that help the IRS market create economies of scale for all market participants,” said Alan Mittleman, Global Head of USD Rate trading at Societe Generale, in the release.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio