Tradeweb's SEF Enables First Electronic Compression Trade with Arcem Capital

Investment manager Arcem Capital, a global macro and fixed-income specialist, has completed the first fully electronic compression transaction of cleared derivatives trades on Tradeweb’s swap execution facility, TW SEF LLC.

The news is a sign that SEFs are developing technology to attract buy side clients by creating more efficient workflows to net trades and free up credit lines at the clearinghouse. Portfolio compression is a risk reduction practice conducted in the interest rate swaps (IRS) market, according to the International Swap Dealers Association (ISDA).

The transaction enabled Arcem Capital, a New-York based financial investment advisor with $1.2 billion AUM, to execute a pool of interest-rate swap trades as one or a zero line-item transaction with Deutsche Bank that was cleared by LCH.Clearnet’s SwapClear.

Compression trade functionality [also known as compaction] allows market participants to package up to 200 swap trades into a one-or zero- line-item trade using the tool, according to Tradeweb. An investment firm can quickly net or terminate trades and increase available credit at their derivatives clearing organization (DCO) by inputting lists of offsetting trade information utilizing up to 85 standardized fields.

"Compression is a highly valuable tool for us to quickly package interest rate exposure we are looking to net or terminate at the clearing house," commented Luis Ontaneda, director of operations at Arcem Capital in today’s announcement. "The Tradeweb solution facilitates the execution of these trades, while boosting productivity as we move toward more electronic derivatives trading on SEFs." Arcem frequently uses swaps, options, government bonds, exchange traded futures and foreign exchange options to implement its directional and relative value strategies, according its investment adviser filing with the SEC.

SEFs recently went live on Oct. 2nd, but since trading is not yet mandatory for institutions, they are using the time to onboard clients, sign documentation and develop new tools such as compression for investors to net exposures and reduce risk at the clearing house.

“By creating a standardized protocol for netting cleared derivatives, our compression tools generate enormous efficiencies for what used to be a very manual process for pricing and executing a large number of swap trades,” said Billy Hult, President of Tradeweb Markets. "As institutional investors actively manage their derivatives positions and available credit in a centrally cleared world, Tradeweb will continue to provide innovative solutions that improve access to liquidity and help reduce systemic risk," stated Hult.

Meanwhile, banks acting as FCMs are ironing out the wrinkles of working with different SEFs and clearinghouses on these operational processes. In a statement,Thomas Hartnett, head of rates and investment grade credit Americas at Deutsche Bank, commented, “Efficient operational solutions are key for market participants as they adapt to a new market structure and we’re working closely with SEFs like Tradeweb to manage that activity in an effective and compliant way.”

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