Post-Trade Headwinds Affect OTC Markets

Terry Flanagan

The ongoing transformation of the OTC industry from a bilaterally traded and cleared model to an exchange-traded and centrally cleared model is fraught with operational challenges.

“There’s a lot of work in connectivity in building out SEFs (Swap Execution Facilities), and not just to CCPs,” or central counterparties, said Henry Ann, head of rates at GFI Swaps Exchange.

At the moment, GFI RatesMatch is connected to its CCPs via a third party ‘middleware’ provider, but some of the newer SEFs have directly connected to CCPs, and GFI is looking at that as well.

The process is complicated because the market still relies upon affirmation through middleware providers such as MarkitWire or Bloomberg Vcon, so if a trade is done between two counterparties, only one of which uses MarkitWire, a dummy account needs to be created at MarkitWire for the other counterparty.

“It’s the same with the top end of the trade,” said Ann. “You have to be connected to credit hubs such as Traiana to ensure pre-trade certainty. You then have to make sure that you are authorized by the FCM to connect by Traiana.”

Euronext, the pan-European exchange group, plans to launch a trade validation and confirmation service for equity derivatives in the spring of 2015, enabling bilaterally agreed trades in derivative products with certain flexible parameters to be reported to Euronext and cleared by its central counterparty, LCH.Clearnet SA.

The service, which will run on Cinnober Financial Technology’s TRADExpress platform and be adapted to Euronext’s specific requirements, will allow investors to create derivative instruments through either a web interface or a dedicated electronic connection, and to report trades with details that go beyond those in the central order book. Clients will also enjoy capital and operational efficiencies of clearing trades in the same clearing pool as their existing Euronext positions.

“Against the backdrop of the G20 post-crisis reform program of increased transparency and reduced systemic risk in derivative markets, we will be positioning our service to deliver clients with the capital efficiency and risk management benefits of central clearing,” Lee Hodgkinson, head of markets and global sales at Euronext, said in a release. “This initiative will allow us to boost the competitiveness of our existing and recently launched products, and will be the springboard for expansion into new derivative products and asset classes, as it directly provides us with opportunities to develop closer links to a broader section of the trading community.”

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