Tradeweb Streamlines Bilateral Swap Unwinds

This article originally appeared in Risk.net here.

Tradeweb has completed the first electronic termination of a bilateral interest rate swap, part of a wider plan to streamline lifecycle events and entice more non-cleared derivatives into electronic trading.

The transaction saw Citi and BlackRock unwind a five-year swap referencing the Sterling Overnight Index Average, or Sonia, in late August. This follows the first fully electronic termination of a swaption in February.

"This is going to be an important stepping stone in the evolution of the electronification of bilateral swaps," says Todd Coletto, head of rates business development for the UK and Europe at Citi.

The latest development is part of a wider plan to extend efficiencies associated with clearing to non-cleared markets. At $100 trillion, non-cleared contracts account for around a third of outstanding interest rate swap notional after adjusting for double counting of cleared trades, data from the Bank for International Settlements shows.

With tenors up to 50 years, many of these instruments are unwound prior to maturity - a "hugely complicated" process, according to Enrico Bruni, co-head of global markets at Tradeweb.

While cleared trades are easily unwound by submitting an offsetting trade to the central counterparty (CCP) which automatically nets and compresses in the CCP's books, bilateral unwinds require reconciliation of contracts, price negotiation, validation and confirmation, all conducted through a patchwork of chatrooms, calls and email.

Tradeweb aims to replicate the cleared world experience, allowing clients to input a MarkitWire ID for an existing trade directly into the platform. It then retrieves the details and matches an offsetting transaction. Once the price is negotiated, notification of the termination is automatically sent to MarkitWire for confirmation and information is sent to both parties' risk systems.

David Morris, BlackRock's head of rates trading, EMEA, describes the approach as "straightforward and highly efficient". Details were agreed electronically on the platform, with confirmation and settlement completed on MarkitWire "within one minute".

Citi's Coletto expects large, liability-driven investors, to be among the first to adopt the technology, with smaller firms taking longer to integrate the new tools into their order and execution management systems.

"You have a big, sophisticated client who makes the first move, and it takes a little bit of time for the rest of the industry to catch up. I think that liability-driven investment asset managers and GBP focused interest rate participants who have the same profile will come onboard relatively quickly," he says.

Lifecycle roadmap

The unwind tool is a critical step in Tradeweb's roadmap for electronifying the full lifecycle of bilateral derivatives.

A planned expansion electronic termination to cross-currency swaps is expected to get underway early next year. The service could also be extended to novations, which see the legal transfer of a bilateral swap from one counterparty to another. Often conducted due to one party hitting credit limits, novations require the original trade to be terminated and a new one created with the new counterparty.

Follow-on projects include electronic credit checking, where dealers must confirm they have enough capacity to face the client before executing or terminating trades.

Tradeweb also hopes to electronify the credit terms governed by the credit support annex, which determine how margin is exchanged between buy-side and sell-side counterparties.

Bruni hopes these upgrades will pave the way for greater electronification of more complex assets, such as cross-currency swaps and options on cross-currency swaps, where the electronification rate is stuck in the single-digit percentages.

"We're very keen to pursue this market segment, which, for valid reasons, has resisted electronification. By focusing on these three components, one after the other, we should be able to bring the efficiency of the electronic world to the non-cleared space," says Bruni.

Citi's Coletto sees growing demand for efficiencies in the cleared world to be mirrored in bilateral markets.

"Electronic platforms like Tradeweb have introduced significant efficiencies into the market," he says. "And I think the industry has gotten used to trading in a specific way. They ask: 'If I can do this for cleared swaps, why can't I do it for bilateral?'."

"It's following the same trajectory as cleared flow: the more vanilla, simpler trades are already going through the platform, and the scope is there to expand into the more complex pricing aspects."

BlackRock's Morris says services that reduce operational risk by eliminating manual processes and deliver time savings could make bilateral swap markets more attractive.

"Electronic workflows have the potential to make bilateral interest rate swap markets more accessible by improving visibility into available liquidity and making it easier for participants to engage with a broader range of counterparties," says Morris.