State Street plans to launch a swap execution facility (SEF) called SwapEx as part of an expansion of its derivatives service offering.
The Dodd-Frank Act called for many types of OTC derivatives to be traded and cleared on multi-party, electronic platforms, called SEFs. The idea is that this will create greater liquidity in the marketplace, but more importantly, reduce the risk inherent in the opaque over-the-counter market, regulators believe.
Similar measures are also undertaken in European regulations such as European market infrastructure regulation and MiFID II.
SwapEx will automate the execution, clearing, collateral management, cash and securities flows between the middle and back offices, transaction cost and risk reporting, valuations, and the reconciliation of positions.
The Commodity Futures Trading Commission is expected to begin accepting applications to operate SEFs later this year. State Street said it would register SwapEx at that time.
State Street said it had already entered into an agreement with the National Futures Association to perform regulatory services for SwapEx.
A number of other organisations have plans to launch or have expressed an interest in launching SEFs, including Tradeweb, MarketAxess, Bloomberg and Intercontinental Exchange, according to the New York Times.
“The derivatives market is in the midst of significant change as it moves away from a bilateral trading model to a centrally traded and cleared environment that offers greater price transparency, liquidity and enhanced risk management,” said Clifford Lewis, executive vice president and head of the eExchange business at State Street. “State Street’s core competencies as a custodian, combined with the advanced technology of our eExchange platforms, including SwapEx, make the expansion of our derivatives solution to include a swap execution facility a natural extension of our business.”
eExchange, a division of State Street Global Markets and State Street Global Services offering solutions in foreign exchange, futures, U.S. treasuries and the subscription and redemption of money market funds and exchange-traded funds, will operate the SwapEx platform.
“Through State Street’s comprehensive derivatives solution, buy-side clients will have a centralised means for trading, clearing and processing their swap positions, managing the related collateral demands, allocating, reconciling and accounting for their positions, automating manual processes, and helping to reduce operational risk,” said Jeff Conway, executive vice president and head of Investment Manager Services at State Street. “This initiative is a strategic priority for State Street and emphasises our commitment to providing solutions for our clients’ changing needs in an evolving marketplace.”
Last September, State Street said it would launch a swap clearing service in preparation for the central clearing of derivatives.
State Street also offers a number of other services for derivatives, including custody and accounting, collateral management, valuation, and risk and analytics.
Reporting by Christopher Gohlke, Global Custodian, an Asset International publication