IsdaFix faces rival based on swap repository data

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Interest rate swap markets now have a supposedly cheat-proof new price benchmark, after London-based Clarus Financial Technology last night began publishing a suite of rates based on trades submitted to swap data repositories (SDRs) - the first time these databases have been used in such a way.

The suite of prices, dubbed SDRFix, is an alternative to IsdaFix - an industry benchmark that is the subject of rigging probes on both sides of the Atlantic. The UK's Financial Conduct Authority confirmed yesterday it is investigating IsdaFix, joining the Commodity Futures Trading Commission.

While the IsdaFix rates are calculated by polling dealers - with contributors asked to submit their own bid and offer for a $50 million swap after considering market prices and quotes available at 11am - SDRFix rates represent the volume-weighted average price (Vwap) of all trades conducted during London trading hours.

"The attraction of using Vwap is that it's very difficult to manipulate. It makes for a more secure index. People can't suddenly execute a lot of trades around the fixing window to move the rate. Anyone looking to game it would have to influence a whole day's trading, and in such volume that it was continually material to the price. It would be much harder to manipulate than a point-in-time index such as IsdaFix, though nothing's impossible," says Amir Khwaja, Clarus' chief executive.

Khwaja says the firm has compared the SDRFix performance to an IsdaFix time series starting on April 1. The rates matched to within a few basis points, he adds.

Anyone looking to game it would have to influence a whole day's trading, and in such volume that it was continually material to the price

The first SDRFix prices are now available for euro-denominated interest rate swaps in tenors of two, three, five, 10 and 30 years. Clarus is also publishing rates for dollar swaps in the same tenors, with additional rates for four- and seven-year swaps. The firm may soon add a second daily fixing for dollar rates, centred on US trading hours, says Khwaja. If there are sufficient volumes available, the firm may move to hourly fixings for some tenors, such as five- and ten-year swaps.

"We expect the index to appeal to the same community of users, principally dealers and institutional investors, that currently uses end-of-day index fixings to mark their trading books to market," says Khwaja. "It's fully transparent; we will disclose all of the trades used in the calculations each day. We believe this shows an example of the value that can be derived from public swap data repositories; this sort of index would not have been possible before the SDRs were built."

Khwaja claims SDRFix satisfies the Principles for Financial Benchmarks published in July by the International Organization of Securities Commissions. The guidelines call for pricing benchmarks to be "anchored by observable transactions entered into at arm's length between buyers and sellers in an active market". They also call for transparency with regard to how prices were arrived at, including information on the number and volumes of underlying transactions.

SDRFix uses data from the Depository Trust & Clearing Corporation's (DTCC) repository in the US - no other SDR currently has enough data, Khwaja says. The published euro rates are based on trades submitted to the same repository, but Clarus plans to switch to the DTCC's European SDR once it goes live. Others will also be considered. "We would look at utilising data from any SDR in Europe that has significant volume in rates, of which there will likely be at least two or three," Khwaja adds.

The firm is not immediately seeking to monetise its offering; prices are available free on the Clarus website. Khwaja says the company is open to licensing the index methodology to firms that want to build products referencing the rates.

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