Technology award – Technology platform of the year - SwapsWire

The bank-owned platform has become a key industry hub for servicing OTC derivatives trades

By their nature, over-the-counter derivatives trades are messy to process, traditionally involving pages of contracts, confirmations and reconciliations, even for vanilla products. With manual methods, banks, brokers and others involved in OTC deals have to book their trades using paper, faxes, emails and phone calls. The costs are high, as are processing failures, leading to operational risk.

That is why a number of banks got together to create SwapsWire – a platform that provides automated confirmation and booking of OTC trades. Launched at the end of 2002, London-based SwapsWire has been steadily extending its services and gathering momentum, and came of age in 2004 as a key industry hub for servicing OTC derivatives trades.

As with the automation of any trade process, processing OTC derivatives online requires three things – a standard for exchanging data, a robust platform to perform the matching and confirmation, and a critical mass of users to make the effort of linking to the platform worthwhile. SwapsWire now has all these elements in place.

SwapsWire makes use of the Financial products Mark-up Language (FpML) – the industry data standard for OTC derivatives – for all its messaging. This is not only advantageous to its own operations, but also to those organisations that use the service, because it means they no longer have to write interface code and accommodate proprietary data formats with every counterparty connection they make.

“We connect to SwapsWire via a single FpML-based interface, and we are now fully connected to every other bank, inter-dealer broker and client using SwapsWire,” says Andy Hudis, a managing director at Goldman Sachs. “We’ve avoided having to [write programming code for] a multiplicity of different interfaces and standards.”

SwapsWire’s platform has been able to cope with a growth in volumes that has doubled every six months, and now handles around 300,000 trades a year. In creating the platform, SwapsWire introduced several innovations to the process of confirming and booking OTC derivatives trades. First, it proposed that when dealers execute trades they confirm the transaction details are correct at the time they are booked into position-keeping systems. This eliminates the downstream process of matching and resolving mismatches, and is a key element in SwapsWire’s ability to help users reduce operational costs and risks.

“Eliminating downstream processing and problem resolution means we have fewer volume constraints and greater confidence that high turnover can be handled without increased operational risk,” says Michael Davie, chief operating officer of European credit and rates at JP Morgan.

SwapsWire has also combined the formerly separate processes by which a dealer confirms trades with brokers and counterparts while maintaining their contractual differences by allowing inter-dealer brokers to submit trades to dealers using SwapsWire’s FpML messages. And last year, SwapsWire formed a link to London-based clearing house LCH Clearnet, further extending for its users the straight-through processing (STP) of deals to include clearing.

But this type of functionality is only useful if there is a critical mass of users. SwapsWire is owned by a consortium of 22 dealers, including JP Morgan Chase, Goldman Sachs and Lehman Brothers. In addition, most major inter-dealer brokers, including Icap and Tullett Liberty, are also connected to the platform. Furthermore, over the past year the company started to link buy-side firms to the platform, although it would not name any of them. However, Henry Hunter, chief marketing officer of SwapsWire, says the buy side is a growth area for the platform as swaps become more of a mainstream instrument for the investment industry. To help service this element of the market, SwapsWire last year introduced functionality to simplify assignment or novation processing.

In 2004, SwapsWire also extended its support to new instruments such as swaptions and option products, in addition to interest rate swaps, forward rate agreements, overnight index swaps and credit default swaps. It also added seven Asian currencies, including the Hong Kong and Singapore dollars, to the nine currencies it already supports. The organisation is also talking to its member banks about introducing equity derivatives.

SwapsWire has now established itself as an essential industry utility. “Looking back at the two years the system has been running, we can clearly see the reduction in risk,” says Andrew Morton, managing director, co-head of global rates at Lehman Brothers. “We’ve been able to grow our business at a rate that would otherwise have meant a much bigger growth in our operational cost base. The system is now integral to our operation.”

Marc Campbell, head of swaps trading at Commerzbank, which is not a shareholder in SwapsWire, says: “It is in line with the bank’s stated strategy to improve its cost efficiency. A key way to do this in the OTC derivatives trading area, where volumes are rising rapidly, is to reduce the cost per unit of processing trades, and a way to achieve this is to automate the operational procedures.”

Using SwapsWire and its link to LCH Clearnet, Commerzbank is now able to confirm, match and clear trades within 10 seconds. “So now we have full STP of our OTC trades, which brings down our cost base and lowers operational risk,” says Campbell.