Wall Street has continued the slow process of remaking fixed-income trading amid pending regulatory reforms and pressures to cut costs, with announcements this week of new products to clear credit swaps and track bond trades in real time.
MarkitSERV, a joint venture between Markit and the Depository Trust & Clearing Corp, announced on Tuesday it had completed near-real time clearing for credit-default swap trades by several large dealers.
Most credit-default swap trades, along with most over-the-counter derivatives, will be required to be centrally cleared as part of the Dodd-Frank reform act. The current process takes up to five days, with batches of trades sent to the clearing house, but the Dodd-Frank rules require real-time clearing.
Using MarkitSERV’s process, trades last week by Deutsche Bank, JPMorgan and Morgan Stanley were sent within minutes to the clearing house owned by the IntercontinentalExchange, ICE Credit Clear.
“The building blocks of the new Dodd-Frank world need faster connections between trading venues and clearing houses in a real-time manner, and then reporting of those trades to repositories,” said Jeff Gooch, chief executive of MarkitSERV. “That real-time clearing is the last building block we didn’t have in production for credit.”
MarkitSERV, which connects to several clearing houses, estimates that about 20 per cent of the notional $15,000bn CDS market is cleared. Rules for mandatory clearing are still in process.
Also on Tuesday, Knight Capital, among the world’s largest market-making firms, launched a new tool for analysing fixed income trades, called BondScope.
The software platform allows clients of Knight, typically brokers who are trading bonds on behalf of clients, to track the execution of orders more closely and provides support in “identifying where an issue has previously traded or evaluating where similar bonds are priced”, Knight said.
Bonds are typically traded manually between brokers, rather than as shares are on electronic exchanges where automated algorithms execute millions of trades every minute. Efforts by exchanges, such as NYSE Euronext, to create bond exchanges have been slow to take off in the past.
“Over the last few years there has been a real push throughout the fixed-income industry to improve market transparency and execution quality,” said William Vulpis, managing director for Knight’s bond trading platform.
Looming cost cuts at banks will drive further automation, according to Jay Bennett, managing director at Greenwich Associates.
Revenues for trading of interest rates and credit by US commercial banks declined by 6 and 13 per cent, respectively, in the second quarter, according to the Office of the Comptroller of the Currency, versus only a 1 per cent slip for equities.
“As banks increasingly look at the cost side of the equation, they are going to ask why more fixed income isn’t traded more electronically. I think it’s an area where you will start to see a lot more efficiencies,” he said.
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