Leading the way for electronic cross-currency swaps trading
We’re excited to bring a completely new type of derivative to the electronic market, providing participants with the ability to trade cross currency basis for GBP/USD, EUR/USD and GBP/EUR pairs.
Cross-currency swaps explained
The first-ever, electronically-negotiated cross-currency swap was traded and processed on the Tradeweb platform in May 2020. Cross-currency swaps are derivatives traded over-the-counter (OTC) as an agreement between two parties to exchange interest payments and principal denominated in two different currencies. They are highly customisable and can include variable, fixed income rates, or both.
Due to the bilateral and voice nature of the instrument it can be challenging to measure the size of the markets. Although, in 2016, the Bank of International Settlements (BIS) estimated there was an average daily volume of $82 billion traded. Using the U.S. Swap Data Repository (SDR) Clarus estimates value the market at approximately USD $2.6 trillion (Source: Clarus, 2018).
This opaqueness of the market results in a lack of transparency as price discovery is generally done via chat and trades are conducted over voice.
Opening up the electronic shop
There are a lot of positives from trading this type of product in an electronic market space. Since the Tradeweb service digitises all of the trade details, from the launching of the ticket to the post-trade information, elements of the pre- and post-trade workflow can then be automatically integrated into the system. This provides not only efficient straight-through processing and reduction of operational risk, but also provides clients with a full audit trail.
Traditionally, derivatives markets have been slower to adapt to electronic means, compared to their fixed income counterparts. In part this is due to the need for traders to have highly customisable options to help them execute trades. The cross-currency swap is a good example of a true “over the counter” derivative. The more standard parts of the workflow aren’t forgotten in the process though, such as mark to market basis swaps, which the market uses widely. This new functionality allows users to price the ‘vanilla’ swap - an important breakthrough in the electronification of the cross-currency basis workflow.
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Vanilla swaps are only the beginning
With the launch of cross-currency swaps on Tradeweb, we are following an evolution similar to other products in that there is an initial offering around so-called vanilla instruments - in this case in the form of resettable (mark to market) basis swaps. Because these swaps are a true OTC product, we need to ensure a lot of flexibility is built into the way clients request trades and dealers price them. We consider this a work in progress because there is much scope to extend the offering to include less standard swaps such as ‘fixed/float’ and ‘fixed/fixed’ swaps in the future. In our experience, starting with the more standardised parts of the workflow helps market participants feel more comfortable with adopting a new method of trading a product
As the product evolves, we also look forward to eventually being able to offer our clients fully integrated advantages. For example, many clients require the ability to send trades directly to Tradeweb from their order management system (OMS). We have also anticipated our client needs in terms of dealing with the upcoming LIBOR transition, so we are developing our solution for risk-free rate cross-currency swap trading as a result.
Evolving through innovation
Providing a platform for electronic trading of cross-currency swaps is an important product on Tradeweb’s roadmap… but it’s only the beginning. We want this product to evolve, and because of the OTC nature of the product, we need to be flexible and build the functionality our clients need, as well as deliver it in a way that is easy for them to integrate. We always strive to be at the forefront of innovation, and are excited about the opportunities in developing this product even further in the future.
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