Risk Awards 2016
"The interest rate swaps markets are near impossible to break into; they're like a fortress. Our strategy was to offer things the two incumbent trading venues, which have been in the rates market for two decades, wouldn't," says Sunil Hirani, co-founder and chief executive of trueEx, the New York-based swap execution facility (Sef) he launched in 2012.
In practice that meant tackling post-trade challenges, such as how to manage unwinds, compress portfolios or dice up block trades for an asset manager's client funds – services that are unusual, if not unique, for a trading platform.
Buy-side firms were the target consumers, but the benefits are being enjoyed more widely – a consequence of a new regulatory framework that rewards portfolio efficiency. It explains why trueEx was finally able to breach the swaps fortress last year, while the rusting hulks of other new entrant Sefs remain outside the ramparts.
The platform now boasts 19 swap dealers providing liquidity to 74 buy-side firms, which are clearing through 13 futures commission merchants (FCMs). In the fourth quarter, the venue accounted for 11% of dealer-to-client market share in interest rate swaps, having started the year with practically nothing. This growth has been so sharp that the platform transacted more trades on a notional basis in October 2015 alone than in the whole of 2014.
"It wasn't one big change, but the platform really began to gain critical mass. Our plan has been to essentially offer any service the buy side wants, and the second half of 2015 saw us convert some big dealer names on to the platform as well, but getting the buy side's attention in the first place was incredibly painful," says Hirani.
trueEx's crucial insight was that a Sef could be a lot more than a trading venue. The advent of mandatory swaps clearing, coupled with the incoming leverage ratio for banks, penalises buy-side firms that maintain big swaps portfolios, but shrinking them is not easy. In theory, trades that partially or wholly net can be terminated, and layers of swaps can be compacted into a smaller number of positions. In practice, this has traditionally been a manual process, requiring spreadsheets to be emailed to dealers, which then input the data for tens or hundreds of line items into their own pricing tools.
"We asked the buy side what was causing them most pain and they pointed to these manual unwinds – the spreadsheets are all in different formats and they take hours to model. We developed a way to automate unwinds, so line items of any maturity, currency or index go straight through to the dealer's pricers and are priced within seconds. Clients know they don't have to do anything and since the dealers are not entering trades manually there is no risk of error. That is one of the most innovative things we have done," says Hirani.
Swap dealers appear to agree. On December 8, JP Morgan and Royal Bank of Scotland became the first two trueEx dealer liquidity providers to sign up to the Sef's new trueFix service, which provides fully automated rate-swap execution and simultaneous compaction of portfolio line items in US dollar, euro and sterling.
It took a while to convince the clearing houses to accept us as a known source, where we could send them transaction messages
Sunil Hirani, trueEx
Another key feature for buy-side clients is the ability to view aggregate cleared portfolios at LCH.Clearnet and CME on one screen.
trueEx spent three years negotiating access with the central counterparties (CCPs) – again in response to demands from prospective clients – so users of the platform manage, process and reconcile cleared trades directly. The real game-changer though is the ability of clients to quickly port cleared rates positions from one CCP to the other. This tool has become more valuable since pricing differences emerged at the two venues for otherwise identical trades.
"Assume you have a trade where you pay 3% fixed at LCH.Clearnet. To port that position, you need to enter into a new swap to receive fixed at 3% at LCH and then enter into a new pay-fixed 3% swap at CME. That leaves you flat at LCH, while you have the original trade paying 3% fixed at CME. At trueEx, you can do that in one seamless transaction," says Hirani.
A source at one of the CCPs says no other Sef currently offers the same breadth of portfolio-management services for cleared trades.
"Clients have requested direct access to their cleared positions through trueEx, so they can build out one screen for the purposes of compressions, allocations and other activities. trueEx is the only platform offering this functionality in an integrated way with the clearing house. From our perspective, as a CCP, the more compression and post-trade services a platform has, the more line-item reduction we see and the better our default management will be. It's a risk-mitigation tool for the entire system," says a rates specialist at one of the clearing houses.
Trade allocations have also proven a popular feature among trueEx clients using the Sef to direct how one big trade, executed by an asset manager, should be subdivided among client sub-funds and accounts.
"I would say processing and terminations were initially the most popular services we offered, because allocating cleared trades had long been a headache for the buy side. It took a while to convince the clearing houses to accept us as a known source, where we could send them transaction messages. We then had to work with the FCMs to certify us, so it was a huge challenge that meant we just kept going back to convince and cajole them to give us a shot, but in the end it got us in the door," says Hirani.
Since being allowed in, trueEx has not looked back, with growth in executed volumes exploding from only $70 billion at the end of January 2015 to $1.4 trillion as of mid-December, while notional post-trade functionality flows have leapt from $153 billion to $4.2 trillion over the same period of time.
Perhaps the secret to trueEx's success has been that compression and line-item reduction are things that benefit all market participants – not only buy-side clients on the platforms, but also the CCPs themselves and the clearing banks routing end-user trades into clearing. If all stand to benefit, it's no surprise that once the functionality was built, the market soon followed.
"As an FCM, we are generally Sef-agnostic, but there are a couple of things we really like about trueEx. Clearing members are under a lot of stress right now because we have to calculate our leverage exposure using the current exposure method, which calculates capital requirements based on notional, so the ability to generate volumes on a trading platform and then come up with a slick tool to facilitate notional compression is something we really appreciate," says the head of over-the-counter clearing at one bank.
Clients also praise the platform for its focus on post-trade services and the breadth of traded products. "trueEx came in to hear what clients needed first and then they went away to build the solutions we asked for, which was the right way to do it," says one hedge fund manager using the venue. "We already had Bloomberg and Tradeweb on our desks, but, for example, they never developed mutually agreed coupon (Mac) swaps, which we wanted to trade from the beginning. No platform could provide us with a Mac swap, let alone a Mac curve. trueEx was the only platform that went out and did that for us."
Despite its breakout year, trueEx is not resting on its laurels. The platform recently announced plans to launch its post-trade services as a separate business, allowing clients executing on other venues to use its portfolio allocation and compaction services. The Sef will also be looking to add further dealers to its TrueFIX automated trading service in the coming months.
"We are not done yet. We have some tier one US, Canadian and Australian banks that we are still to onboard, so we still have some wood to chop, but we are chipping away at those firms. They will get more attention on our platform than at the incumbent Sefs, because we know we will have to be nimble to cater to their needs," Hirani adds.
The week on Risk.net, March 10-16 2018Receive this by email