Bunched Orders Challenge SEFs

Terry Flanagan

Bunched orders, which enable asset managers to perform post-trade allocations of swaps in a similar way to the futures and equities markets, help clients achieve best price, increase liquidity, reduce operational risk, and maximize ease of execution by allowing clients to trade in their top level account being cleared by their standby clearing firm.

SEF operators are responding by creating procedures to enable swap dealers and participants to allocate bunched orders to CCPs, on either a pre- or post-trade basis.

“One of the most significant challenges for the asset management and hedge fund community lies in the post-trade workflow,” said Sunil Hirani, CEO and co-founder of trueEX. “By providing a fully-integrated and agnostic solution to the challenge of bunched order allocations, we are responding to an immediate and pressing need from the buy-side community.”

trueEX has successfully processed over $100 billion in bunched order allocations, enabling the buy-side community to overcome a significant hurdle in complying with the regulatory trading mandate for swaps, according to the company. Its Post-Trade Services (PTS) platform is execution venue and clearing house-agnostic and enables Futures Commission Merchants (FCMs) and clients to allocate these orders post-trade.

trueEX’s PTS platform allows buy-side clients and their FCMs to directly allocate executed and cleared bunched order trades to a client’s respective sub-accounts at the clearing houses. The platform offers a direct connection to the major clearing houses and can process allocations from any execution venue while providing real-time updates on the allocation status.

Since the beginning of February, the bunched trades have been cleared by Credit Suisse Securities USA (as FCM) and LCH.Clearnet’s SwapClear clearing service. There are an additional two FCMs in the final stages of testing and certification with trueEX.

“As the evolution to central clearing progresses, there is increasing focus on streamlining the post-trade workflow. The processing of bunched orders is one of many innovations that we are currently working on in this area to deliver even greater operations efficiencies to members and their clients,” said Daniel Maguire, global head of SwapClear.

While bunched order allocation has existed in futures and equity markets for years, the introduction of SEFs and a review of the operational readiness of SEFs for trading of clearable bunched orders creates some novel issues for investment funds and asset managers, according to Joel Telpner, partner at law firm Jones Day.

For asset managers, there are currently three models of execution: trading directly in the fund name, executing a bunched order (i.e., orders that are traded in aggregate and then allocated to underlying funds) and performing a pre-trade allocation, or executing a bunched order and performing a post-trade allocation, said Telpner in a client memo.

“For bunched swap orders, there are two available execution-to-clearing trade flows—either pre- or post-trade allocation,” Telpner said. “An asset manager’s preference may depend on a number of factors particular to the manager’s trading practices, investment authority, and fund structure.”

If a post-trade allocation model is used, the asset manager will be required to enter into a “standby” FCM arrangement to guarantee the bunched swap order at the time of SEF execution. This agreement typically states that the FCM will clear the bunched order based on a credit limit applied at the asset manager level and then allocate the order to individual funds post-execution based on instructions from the asset manager.

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