Nov 07, 2011
Tera offers firmer derivatives prices
As regulators in the US and Europe push towards their G20 obligations to move OTC derivatives trading onto centrally cleared platforms, Christian Martin, CEO at new trading venue TeraExchange, says order-driven trading has a key role to play in the reformed market environment.
Under the Dodd-Frank Act, which is intended to reduce systemic risk in the US’s derivatives markets, OTC contracts must be cleared and traded on exchange-like venues called SEFs (swap execution facilities). These can use the request for quotation (RFQ) system – where participants define the contract they require and request a price from a number of brokers – or a limit order book system.
Based in New Jersey, USA, TeraExchange is due to launch one of the world’s first central limit order books for OTC cleared derivatives in Q4 2011. The platform will offer access to both underlying and related exchange-traded instruments, as well as all cleared OTC derivatives including interest rate swaps, credit default swaps, energy swaps, non-deliverable forwards and equity swaps.
“Unlike other swap SEFs, we are an all-to-all platform, not an RFQ venue,” says Martin. “Users will get firm prices, and they will gain opportunities for multi-asset trading as we are listing multiple instrument types. This should provide a better understanding of prices across all assets, as users will be able to compare credit default swaps, bonds, stocks, options etc. for each asset.”
The global OTC derivatives market is valued at around US$600 trillion. Although bringing hitherto customised contracts onto standardised platform might appear both challenging counter-intuitive, Martin argues that some 80-85% of this is based on interest rate swaps, of which about 80% are relatively uncomplicated and thus can be easily listed.
Market participants on TeraExchange should gain capital efficiencies, he explains, through its relationship with the CME Group which facilitates clearing of OTC instruments and hedging with futures-related instruments.
“We will be able to provide as much as 85-95% margin release, on for instance the OTC interest rate swap versus the futures product that compliments it, as long as you are having both trades cleared by the same institution,” says Martin. “If for example you are long on the interest rate swap, the OTC product, then you short the futures product against it, rather than getting two disparate margin cycles, they recognise that this can be offset.”
TeraExchange will also feature interactive charting indicators for both product and underlying instruments, as well as a customisable cross-asset spread trading tool, designed to help users find trading, hedging and arbitrage opportunities. It will offer pre-trade credit checks on all bids and asks, while central clearing can be handled by the CME Group, as well as IntercontinentalExchange and LCH.Clearnet.
In addition, the exchange prides itself as an independent, neutral venue that should appeal to a wide range of users. “We are independent – we’re not backed by a particular group, nor are we serving at the altar of the dealers exclusively,” says Martin. “Our multi-asset trading capabilities can be shaped to accommodate a near limitless number of objectives and strategies.”
Initially registered as an exempt board of trade for swaps and other OTC cleared derivatives, the exchange will apply to officially become a SEF once the final rules are resolved by the US Securities and Exchange Commission and Commodity Futures Trading Commission in early 2012.