The Rise of Electronic Compression Trading in Swaps

The implementation of global reform in the interest rate and credit derivatives markets has driven vast change across the institutional investing community over the past several years. Traders continue to adapt to operating in this new regulatory environment as we move closer to mandatory trading of swaps on swap execution facilities (SEFs) in February 2014.

However, the Dodd-Frank Act in the U.S. has also brought some unexpected issues forward as regulators have increased clarity on the ways these products will be traded, cleared and reported going forward. Not unlike the need for pre-trade credit checking, non-self-clearing entities are implementing new solutions to net or compress their interest rate derivatives exposure.

A familiar practice for traditional sell-side market participants, other derivatives trading institutions are using compression tools to achieve greater efficiency at lower costs through electronic trading. On the Tradeweb TW SEF, customers are now netting or terminating compression packages of up to 100 IRS trades into one or zero line-item transactions. Helping to streamline the overall workflow with their liquidity providers, an investor can quickly compress trades and increase available credit at their derivatives clearing organization (DCO) by inputting lists of offsetting trade information. The Tradeweb compression tool significantly reduces time required to enter trade information, using up to 85 standardized fields that are easily uploaded to the platform.

Tradeweb’s TW SEF marketplace and our compression tools generate enormous efficiencies for what was a very manual process for pricing and executing a large number of swap trades. Users of the compression trade functionality can easily review or export all line-item data post-execution into their risk management systems, an essential component to evaluate overall credit exposure at a DCO while reducing overall systemic risk.

And though many market participants are just starting to test out this functionality, it will not be long before electronic compression trading becomes a major consideration for desks focused on faster and leaner operational workflows. For more information about compression tools within our SEF offering, please contact us.