Once Swaps are in the Clearinghouse, the Real Work Begins

While the transition of the OTC derivatives marketplace to central clearing is already underway, there are still a bunch of life cycle processes that need to be managed once positions are in the clearinghouse.

Yesterday, trueEX, a regulated swaps exchange, said it plans to launch a service providing termination, compaction, re-balancing and back-loading services to clearing clients of CME.

“PTC allows you to automate terminations completely interoperable with the positions at the CME,” said Sunil Hirani, CEO of trueEX in an interview.

According to KIm Taylor, president of CME Clearing in the release, clients "need to actively manage their cleared portfolios by reducing line items and maintaining the most capital efficient state of their aggregate risk across cleared and bilateral swaps."

PTC stands for portfolio, termination and compaction. “Once your positions are in the clearinghouse at CME, you need to be able to manage your positions. You put a swap on, you need to terminate it, you need to compact it, he says.

Pending regulatory review by the CFTC, trueEX, the first designated contract market (DCM) for interest rate swaps, will offer CME clearing clients access to trueEX’s proprietary PTC platform.

“What we allow is an automated, regulated and connected platform with the CME that allows the buy side to manage their positions at the CME,” explained Hirani.

So while much of the focus for the industry has been on connectivity to clearinghouses, once the positions are in the clearinghouse, there is more work to do.

Compaction means that if someone has put on 10,20 or 30 swaps, with all different coupons and maturity dates, compaction allows them to remove line items, net their positions and clean up their books.

PTC also enables someone who has bought derivatives to grab those positions and sell them one day. “PTC is about doing stuff to your existing positions in the clearinghouse –which is to terminate, compact or rebalance, “says Hirani. All of this can help dealers, buy side firms and FCMs to reduce their margin and capital requirements.

“This is a product that solves a desperate pain point that the buy side has had for a long time,” said Hirani. Buy side firms, dealers and FCMs can access the product, according to Hirani. “We built it for the buy side first but it’s for use by the buy side, dealers and FCMs. “We are getting clients introduced to us through dealers as well as FCMs,” he said. It allows them to manage their cleared positions and instantly in an automated fashion connect to the clearinghouse.

Today, these manual processes take hours, and are prone to operational errors, while PTC turns that into minutes, according to Hirani. While each of the buy side is able to do portfolio compaction and termination in a non-standardized and un-cleared way, Hirani says that trueEX will allow them to use a regulated platform where all of this will happen in an automated fashion.

Backloading is another type of service which applies to buy side firms that have existing bilateral trades and can use the PTC service to “backload” them into the CME Clearing. Also, PTC can be used for trades executed at trueEX or away on other exchanges or platforms. “It’s an open platform that doesn’t have the roach motel problem – that you can check in but you can’t check it out,” says Hirani, who emphasizes that PTC is open and agnostic to swaps.

It will be interesting to see if trueEX cuts deals with other clearinghouses, such as LCH.Clearnet, which is the largest clearing house for interest rate swaps.