New Straight-Through Trades Highlight Swap Clearing Appeal

A pair of recent trades may offer early indications customers of big banks are warming to the idea of backing their swap trades through new clearinghouse services.

Electronic market operator TradeWeb on Tuesday said it had cleared the first customer interest-rate swap trade executed on its electronic platform, days after Deutsche Bank (DB, DBK.XE) reported clearing a similar transaction on its own platform.

The twin trades may provide evidence that amid the regulatory clamor for over-the-counter derivatives to be shunted to exchanges and clearinghouses, the profit motive may be a more powerful driver.

Moving away from negotiating trades on the phone and then entering them manually in computer systems helps to streamline back offices and eliminate errors.

Clearing--the process in which a central counterparty stands between every trade to reduce the risk if one side defaults--is key to regulators' plans to revamp rules for off-exchange markets including interest-rate swaps and credit derivatives.

Dealers have been moving toward clearing for years, with regulatory requirements to do so now being shaped in the U.S. and Europe.

Some customers trading swaps with the banks have resisted the idea of a regulatory mandate to clear their business, citing costs associated with posting collateral for trades.

But as clearinghouse operators expand their services to so-called "buy-side" participants such as hedge funds, asset managers and corporations, some are becoming curious.

"We're finding that [clearing] is one of the top-level conversations we're having at all levels with our clients. People want to talk about it and understand what's required to connect," said Serge Marston, head of e-commerce business development for Deutsche Bank.

Last week Deutsche Bank had its first set of interest-rate swap transactions executed through its electronic trading platform Autobahn and cleared via dbClear, which acts as a pipeline to derivatives clearinghouses like London-based LCH.Clearnet.

"From Deutsche Bank's perspective, our view is that clearing needs to be an intrinsic part of our offering to clients," Marston said.

Deutsche Bank estimates that 65% of customer business in the interest-rate swap market could be cleared if authorities require standardized contracts to be backed up. But even without a mandate, the firm sees a "large amount" of interest in the service.

Tradeweb Chief Executive Lee Olesky said that swap buyers like asset managers and insurance companies will gravitate toward the price transparency and risk reduction offered by electronic trading and clearing.

"I think you'll have a much stronger system," he said.

Tradeweb, which facilitates electronic trading of derivatives through a multi-dealer auction system, has seen more than $5 trillion in interest-rate swaps change hands on its platform since 2005.

Adding clearing links to LCH.Clearnet and platforms operated by IntercontinentalExchange Inc. (ICE), CME Group Inc. (CME) and Nasdaq OMX Group Inc. (NDAQ) will fuel further automated trading of interest-rate and credit default swaps at Tradeweb, Olesky said.

Joel Telpner, a structured finance partner at law firm Jones Day, said that the buy side remains "haunted" by the downfall of Lehman Bros. Holdings (LEHMQ) in 2008, as a result of which many firms' collateral were tied up in lengthy bankruptcy proceedings. Some of that could have been avoided by clearing swap transactions done with the bank, he said.

"The more that it's feasible for smaller and mid-sized buyside players to access these markets without having to invest a lot of money in either hardware infrastructure or hiring a lot of additional people, [the more] that facilitates and eases the movement toward clearing," Telpner said.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com

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