Liquidity majors back SwapsWire's equity options service

The top 12 equity derivatives dealers will process over-the-counter equity option transactions through SwapsWire’s automated confirmation service when it launches in the second quarter of 2005.

Launched in October 2002, SwapsWire offers trade capture and straight-through processing (STP) services to the vanilla OTC derivatives market. So far it offers services for credit default swaps, interest rate swaps and other interest rate derivatives.

The backers for the latest move are Barclays, BNP Paribas, Calyon, Citigroup, Credit Suisse First Boston, Deutsche Bank, Dresdner Kleinwort Wasserstein, Goldman Sachs, JP Morgan, Merrill Lynch, Société Générale and UBS.

“We will continue to look at new products in the interest rate, credit and equity asset classes,” said Chip Carver, SwapsWire’s chief executive. He added that commodities had “a lot of potential”.

Electronic STP eliminates the need for counterparties to devote resources to post-trade matching and confirmation of trades, therefore reducing operational risk and controlling costs.

Eric Litvack, Paris-based head of equity derivatives flow trading at Société Générale – which dominated the equity options categories in Risk’s inter-dealer survey in September 2004 – said banks may have a backlog of unmatched transactions that could be pending for days, particularly when trading volume is heavy. "[With STP] you can match your OTC trade with legal and contractual obligations at front-office level – you bypass all the back-office matching process," he said.

Dealers can scale their existing SwapsWire technology to receive services in new product areas. And SwapsWire's extension into OTC equity options may have already garnered a critical mass of liquidity providers in that asset class.

Unlike the majority of fixed-income swaps, equity options are also traded on listed exchanges, which incur less risk compared with the OTC market due to highly standardised contracts. But this comes at the price of greater rigidity – for example, only quarterly expiry dates are available in the listed equity option market. STP takes the OTC market a step closer to the characteristics of the listed market while maintaining the former’s flexibility, which users hope will encourage more market participants.

Litvack believes the cost saving compared with listed equity options will be between 25% and 75%, athough he conceded that exchanges may react by lowering trading fees to avoid losing business.