Equities Swaps Get Post-Trade Makeover

Terry Flanagan

Traiana’s launch of Harmony CCP Connect for Equities will provide efficiency and cost savings as CCPs net these transactions alongside existing on-exchange flow, reducing the cost of settlement, they noted. Traiana estimates that participants could reduce settlement costs for OTC equity trades in EMEA by up to $30 million on an annual basis.

The transfer of OTC equity trades from the existing bilateral settlement model to a central clearing (CCP) model, represents a proactive approach by the industry to reduce counterparty risk, increase transparency and assist in achieving T+2 settlement through trade compression, industry experts said in a November 25 webinar moderated by Traiana.

“CCPs have traditionally serviced trading venues–primary exchanges and MTFs– but there’s a big area that CCPS haven’t covered, which is OTC equities clearing,” said Roland Chai, head of equities at LCH.Clearnet. “This is the first step in opening up accessibility to clearing, netting and STP for cash equities. It’s not just CFD swap giveups, but it might be a whole set of bilateral trades like exchange for physicals.”

LCH.Clearnet has spent a lot of time developing multiasset class functionality, “so the next step would be looking at CFDs, futures, options and OTC products,” said Chai. “The opportunities are higher to net some of those coast savings either by compressing positions or reducing settlement costs.”

Credit Suisse, J.P. Morgan and Instinet are automating the central clearing of their OTC equity trades via Harmony CCP Connect in order to match and clear equity contract for difference (CFD) related hedging trades at their preferred clearinghouse. CCP Connect for Equities will have additional banks joining the network over the coming months and is currently connected to three CCPs—LCH.Clearnet, EuroCCP and SIX x-clear.

“What interoperability among CCPs does is allow users to concentrate their flow with their CCP of choice, no matter on which platform they trade or what bilateral transactions they enter into, so that all transactions on the same security can be netted into a single settlement,” said Diana Chan, CEO of EuroCCP. “The Traiana initiative means that any user of the service can direct the flow to the same CCP and eliminate 100% of the settlement cost that used to be quirt e onerous when every trade had to be settled bilaterally.”

With global markets targeting shorter settlement cycles, the Traiana initiative increases straight-through processing on non-exchange flows and reduces settlement cost, according to Lee Ellmore, global head of securities, FX & OTC strategic change at Credit Suisse.

“When you look at the volume growth of equities and STP in terms of what we achieved on a cost per trade, then exchange flow is very cheap,” Ellmore said. “The bilateral world has also grown, but it’s never gotten involved in the full front to back STP that exchanges have had the opportunity to do. It opens up the door to the wider population of non-exchange flow. The more we can get into these types of models, the more interoperability we can create.”

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