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NPV List and Compression Trading: New efficiencies, new opportunities

| Derivatives

Electronic swaps trading is reaching higher levels of sophistication and maturity, with buy-side firms leveraging automation to achieve greater operational efficiencies and support new trading strategies.

Trade compression, for example, has evolved from being a time-consuming manual process to becoming a highly-automated workflow that underpins streamlined swap execution on electronic trading platforms. Today, compression is not used just as a ‘housekeeping’ exercise, the technology underlying the ability to trade lists of swaps is facilitating multiple new styles of trade execution and strategies. The ability to quickly enter customized strategies with full flexibility on the underlying swaps allows clients to fully unlock the value of the pricing infrastructure available in electronic swaps trading.

Tradeweb’s compression and list trading service has seen a steady increase in volumes in recent years as firms have looked to automate, standardize and streamline their swaps trading activities. Demand continues to increase and evolve as buy-side clients continue to automate their execution workflow, expand into new currencies and trade types, and use list trading technology to execute their trading strategies.

Evolution of list and compression trading

For firms actively trading interest rate swaps, compression has long been a valuable exercise from a position management and trading efficiency perspective. By reducing the number of trades sitting on its books at the clearing house, compression lowers the firm’s trading risks, costs and margin.

Before electronic execution reached the kind of levels we see today, compression trades were completed manually and intermittently. It was a significant and time consuming exercise for all involved:

  1. The trader would have to collect and send the package to trading desks, via email and chat
  2. The sell-side would then convert the data into their pricer and send to their booking system, creating a confirmation once executed

Tradeweb’s list trading solution was developed five years ago, in response to client demand to execute large numbers of centrally-cleared swap transactions in a standardized fashion. Executing these packages electronically improved price discovery, reduced execution times and significantly decreased operational risk.

As central clearing of swaps was mandated in the U.S. and subsequently other G20 jurisdictions – gradually replacing bilateral unwinding and settlement – volumes of cleared trades soared. Further, clearing house rules required execution of an exact offsetting swaps in order for netting to be permitted. As such, compression needed to become much more precise, consistent and automated.

With electronic swap execution also becoming mandated, marketplace operators such as Tradeweb developed new trading platforms – swap execution facilities (SEFs) – which enabled seamless request-for-quote trading of swaps, including compression trades, by introducing efficiencies at each stage of the transaction chain, from pre-trade credit checks to execution to clearing and reporting.

Compression trades can be loaded into Tradeweb in multiple ways: directly from the client’s order management system (OMS), from the Tradeweb blotter, adding swaps directly on Tradeweb’s interface, or via a spreadsheet. Once uploaded, the enquiry is sent to liquidity providers for pricing of the whole package with a total NPV. The client executes on the best price and Tradeweb automatically confirms the trade, sending post-trade risk messages and positions to the clearing house.

Compression today

Since launch, Tradeweb’s compression service has been used to compress more than 325,000 line items with a total executed notional value of nearly USD 40 trillion.

Recent years have seen an intensive period of process reengineering, as trading migrated to SEFs and central clearing became the norm. As they automated their trading processes, buy-side appetite increased for further efficiency and flexibility. The technology underlying compression allows for the standardized pricing of a list of swaps and facilitates multiple new ways of executing risk.

Clients use our list trading tool not only to execute risk neutral packages for line item management, but also for outright duration, curve, and butterfly risk. The ability to receive a price back within seconds, on any type of swap broadens the range of strategies clients can execute.

New use cases of list trading continue to emerge. Clients have used list trading to facilitate the migration of their portfolios to new risk free benchmarks, from LIBOR. This has been seen significantly as clients have closed out existing GBP LIBOR positions and entered new SONIA swaps. The tool is also used to trade across multiple CCPs and manage CCP basis risk - a dynamic initially seen in the US as clients traded between CME and LCH and now being seen in Europe with Eurex.

Tradeweb continually expands the scope of our list trading service, adding new currencies, and developing new functionality requested by clients. We will continue to respond to our client base and the markets needs as electronic trading evolves.

To find out more about how to use Tradeweb’s compression and NPV list trading tool start the conversation here.