A new soon-to-be-launched trading platform will offer the buy-side a new and innovative means of sourcing non-standardised swaps that may become more expensive to trade and fund under new laws.
The new mechanism, called DerivaTrust, lets market participants upload non-standardised instruments anonymously via an application similar to those used to create smartphone ‘apps’ and specify the rules of engagement, such as permitted counterparties, currencies and contract terms.
Registered buy-side traders can then search through the contracts on offer and securely negotiate terms with the creator.
Once agreed, the contract exits DerivaTrust and is traded bilaterally between the two counterparts.
DerivaTrust was developed by Saheed Awan, a long-standing collateral management expert and partner at advisory firm Global Collateral Management Solutions, and Hieu Tran, founder of systems developer Viosoft Corporation, in response to new impending rules governing OTC derivatives.
Under the legislation, which is due for implementation in the US and Europe by the end of this year, many derivatives currently traded over-the-counter will be standardised so that they can be traded on exchange and centrally cleared. The US has enacted the rules via the Dodd-Frank Act, while Europe has used a combination of the European market infrastructure regulation and MiFID II.
Exotic and illiquid contracts that are not suitable for standardisation can continue to be traded on a bilateral basis, but will be subject to higher capital charges.
Tran said that DerivaTrust could help alleviate the extra costs associated with exotic swaps and allows the buy-side to take matters into its own hands.
“Through use of DerivaTrust, buy-side firms will have a means of finding complex derivatives without relying on inter-dealer brokers,” said Tran. “This allows them the broadest possible search for their exposure and eliminates the commission that needs to be paid to inter-dealer brokers, which can be quite high for contracts that have long maturities.”