Swaps Trading Looks to the Future

Terry Flanagan

Futures exchanges and trading technology companies are devising new business models which blend the worlds of exchange-traded and OTC derivatives, as regulations are scheduled to take effect that will transform the world of OTC derivatives exchanges.

Trading Technologies International, a provider of trading software for derivatives, plans to offer a gateway to U.S.-based futures exchange Eris Exchange, through which Trading Technologies will connect its trading software to the Eris SwapBook electronic trading platform.

Eris Exchange, which functions as a designated contract market (DCM), provides forward starting interest rate swap futures that are cleared by CME Clearing and traded on Eris SwapBook and Eris BlockBox.

“Trading Technologies is focused on the DCM model,” said Rick Lane, chief technology officer at Trading Technologies. “So Eris is enticing because it’s a cleared order book, of which Trading Technologies is a proponent.”

The new connection, which is currently targeted for release in the fourth quarter of 2012, will enable Trading Technologies customers to trade benchmark Eris Exchange Interest Rate Swap Futures and inter-market spreads through Trading Technologies’ X_TRADER trading platform and related products, including ADL, Autospreader and FIX Adapter tools.

“Trading Technologies’ server-side spreading engine, Autospreader Strategy Engine, in particular, unlocks the potential for traders to execute compelling inter-market trading strategies electronically using Eris Exchange Interest Rate Swap Futures,” said Neal Brady, chief executive of Eris Exchange, in a statement.

New swap dealer regulations, which go into effect on October 12, require that entities that have more than the de minimis level of dealing must register by no later than two months after the end of the month in which they surpass the de minimis level, according to an FAQ published by the Commodity Futures Trading Commission, the U.S. regulator, on Monday.

By way of example, if an entity reaches $8 billion in swap dealing the day after October 12, then the entity would have to register within two months after the end of October, or by December 31.

The Eris Exchange model provides a standardized swap product that concentrates liquidity, eliminates line item proliferation and reduces the need for compression.

The product design collapses multiple cash flows associated with OTC swaps into a single futures price and cash flow which transfers through variation margin in a futures clearing account, according to the company.

As a DCM, Eris Exchange is in a position to address demand by swap end users seeking to tap new liquidity pools and maximize capital efficiency in advance of the Dodd-Frank clearing mandate.

Trading Technologies clients will have access to two, five and 10 year Forward Starting International Monetary Market (IMM)-dated Eris Exchange interest rate swap futures. The IMM dates are the four quarterly dates of each year which most futures contracts and option contracts use as their scheduled maturity date or termination date.

Clients using Trading Technologies’ Autospreader spreading tool will have the option to trade cross-exchange spreads if they have access to other exchanges, such as futures “invoice spreads” using Eris Exchange futures and Chicago Mercantile Exchange Treasury futures, Lane said.

Invoice spreads, in which an interest rate swap is paired with a Treasury futures contract of similar size and tenor, are popular in the current market where the swap leg is an uncleared OTC interest rate swap because they allow trades to isolate the basis between the Treasury and interest rate swap markets.

Invoice spreads may be constructed using Eris interest rate swap futures contracts as the Libor leg of the trade, in place of an OTC interest rate swap.

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