Tim Keenan and James Palmer

Swaptimization, the new service from EquiLend, promises to make the total return swaps market more efficient. Tim Keenan and James Palmer explain

EquiLend has launched a new matching platform for total return swaps. Why have you gone down this avenue?

Tim Keenan: From our close ties to the securities finance industry, we were encouraged to look to provide a source of automation and efficiency for the total return swaps (TRS) market in a similar way that we have and are continuing to provide to the securities lending and repo markets. When EquiLend was created by our owner market participants 15 years ago, we saw the same need for an efficient technology solution for the securities finance market as we now see for the TRS financing market. Through leveraging our expertise, existing technology and deeply embedded client relationships, our aim is to replicate the success of the EquiLend and BondLend trading platform in this expanding market.

How attractive is the synthetics business to your current stable of clients? Is it a service that will attract a new kind of customer?

James Palmer: The markets have certainly seen a shift in dynamics as the banks face the changing regulatory landscape. Synthetic financing balances have risen as an off-balance sheet alternative to access funding and cover short positions.

Where firms are focused on attaching the cost of balance sheet to each trade across financing groups, the synthetics business is treated advantageously and is therefore often a cheaper alternative.

This shift has caused ripples down the chain of the securities lending and repo market participants, with many traditional lenders looking to see how they can play a part in this new dynamic.

How does the TRS service work for counterparties, and what are the benefits?

Palmer: Swaptimization leverages our proprietary algorithm to create a centralised pool of liquidity to fund long inventory and cover synthetic shorts. Each participant is able to load a list of long inventory and/or short needs into a matching session that, taking into account credit limits, pairs the securities they have loaded with counterparties on the other side of the trade. Our new graphical user interface (GUI) then makes it easy to communicate and agree the matches with one’s counterparties before producing a comprehensive term sheet once the trade has been finalised.
Live trades are then reflected on the screens that support the full trade lifecycle, managing unwinds, substitutions, resets and expiries.

Our technological solution automates a trade that happens either bilaterally or manually via voice brokers today. By centralising market participants into a single venue, the available pool of liquidity is greater than that available in the broker market.

The GUI also makes the agreement of the TRS more efficient than existing processes—which, with additional plans to leverage existing connectivity to our client base to automate the trade booking and confirmation, adds scalability to this enhanced market access.

Is it a standalone service or added value?

Palmer: At EquiLend we view each individual service as value added. Swaptimization is tailored to the derivatives side of the trading market and as such sits as a standalone service to EquiLend’s and BondLend’s core suite of services.

What can you tell us about the service as it stands, in terms of who can use it and where? What about plans to expand?

Keenan: The Swaptimization sessions represent EquiLend’s first move to add efficiency to the TRS financing market. In doing so, our client base has highlighted a number of additional areas in the lifecycle of the trade that we will be looking to focus on and further leverage our existing suite of services. As an industry-owned entity, our direction is led by the market participants themselves. We will continue to innovate where we are needed, be that in expanding into alternative TRS trade flows, aiding the middle-office risk teams, or collaborating with existing industry solutions.

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