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Tradeweb Completes Electronic Pre-Trade Credit Check on Buy-Side Swaps Trade

The derivatives platform demonstrated electronic pre-trade credit checking with an FCM for cleared swaps, using both ping and push protocols.

Today, Tradeweb, a fixed income and derivatives trading network, said it supported the first electronic indicative pre-trade credit check between a buy side client and a futures commission merchant (FCM) for an over-the-counter derivatives transaction.

The customer received an indication of available credit from J.P. Morgan as the clearing bank and executed a cleared interest rate swap trade.

As a result, the buy side client is able to electronically check credit with the clearing bank, in preparation for regulatory reform, said Tradeweb in today’s release.

The news comes ahead of a mandatory clearing deadline for derivatives taking effect on Monday, June 10, 2013. Under Dodd Frank, electronic trading platforms must perform a pre-trade credit check to ensure that the clearinghouse will accept the customer’s credit worthiness for OTC derivatives transactions.

“Tradeweb has taken an important step toward pre-execution certainty of clearing,” commented Andres Choussy, Global Co-Head of OTC Clearing at J.P. Morgan. Tradeweb’s ability to give an indication of available FCM credit lays the foundation for the ultimate goal: a legally binding credit commitment from both the FCM and the clearing house,”added Choussy.

Integrated at the point of execution, Tradeweb’s functionality allows the client to check for credit with their clearing banks using either ping or push-based protocols ahead of executing a swap transaction. The goals were to create pre-trade credit checking tools that were efficient and cost-effective, minimized latency and ensured information security and confidentiality.

“Pinging” and “push” refer to the different ways of building a credit-checking tool, explained a spokesman for Tradeweb through email. “Pinging provides a drop-down on a trading ticket, which allows the client to choose its clearing member. When the ticket is sent, the clearing member returns a message to the dealer to confirm that the credit has checked out.”

In a “push” protocol, the SEF uploads credit limits from a clearing member at the beginning of the trading day and stores the information locally. This allows for a real-time turn-around time.

There is also a hybrid approach whereby the SEF [swap execution facility] uploads the credit limit from the clearing member at the beginning of the trading day. A tolerance limit is set, for example, at 75%. When the client reaches the tolerance level – which is monitored by the SEF – the clearing member is asked by the SEF to raise the limit. The limit stored within the SEF is then adjusted accordingly. This approach allows the clearing member to retain control and confidentiality. The buy-side clients like this approach because there is virtually zero latency and trade information is not communicated to the executing dealer and clearing member prior to the trade, explained Tradeweb’s spokesman.

“As the first marketplace to successfully demonstrate electronic pre-trade credit checking with an FCM for cleared swaps, we are helping our clients prepare to trade under impending derivatives regulation,” stated Lee Olesky, CEO of Tradeweb in today’s release.

In addition to pre-trade credit-checking functionality,Tradeweb offers clients access to liquidity through a range of trading protocols and connectivity to all major clearinghouses currently handling credit default swaps an interest rate swaps transactions. More than 20 liquidity providers and over 300 institutional clients currently participate in Tradeweb’s multi-dealer to client derivatives markets.

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

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