Traiana, a provider of post-trade and risk solutions has announced that the firstFutures Commission Merchant (FCM) has completed production testing, in collaboration with Credit link, for swaps clearing. Under new Dodd Frank rulings certain OTC products will face mandatory clearing on trading venues known as swap execution facilities (SEFs) or designated contract markets (DCMs). The facility will go live for trading in interest rate and credit default swaps.
The new development had input from leading FCMs and has been delivered using Traiana’s proven cross-asset CreditLink service, the service offers clearing firms and buy-side firms the ability to manage trading and clearing limits in low latency for interest rate, credit and foreign exchange (FX) swaps.
Firms will be able to pre-screen orders to trade swaps prior to execution, ensuring certainty of clearing acceptance by their clearing member at the time of execution. This is one of the fundamental tenets of CFTC regulation 1.73, designed to reduce systemic risk and ensures that clearing firms are in compliance with regulations in the United States and Europe.
The clearing facility is expected to be rolled out to five additional FCMs as well as buyside firms, fund servicing firms, and order management service providers are currently in the process of joining the service and production testing.
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The main objectives of the pre-trade clearing are to; optimise access to liquidity and reduce limit fragmentation for buy-side firms, CreditLink supports request-for-quote and request-for-streaming trading using a centralized limit check (Ping model) and also gives clients the ability to allocate limits directly to specific trading venues to minimize latency (Push model), which is important for executing brokers, market makers and venues using central limit order books.
CreditLink also provides buy-side firms centralized management of limits across all their clearing firms, trading venues and CCPs to reduce fragmentation of limits, as well as pre-trade ‘what-if’ checking, essential for firms managing funds and trading on behalf of separate accounts/legal entities to be compliant with new swaps clearing regulations. Furthermore, the service also supports real-time post-trade limit checking of block trades and allocations presented for clearing, important for clearing firms who must quickly accept or reject trades under real-time clearing rules.
“We are very pleased that the first FCM has completed production testing, as we all continue to prepare the industry for upcoming deadlines for mandatory clearing,” said Nick Solinger, Chief Marketing Officer, Traiana.
The much awaited Dodd-Frank rulings were prescribed into US law in July 2010, they are regarded as the most comprehensive reforms in the US financial services regulatory space since 1933 (great recession), covering broad aspects such as the oversight and supervision of financial institutions and the regulation of over-the-counter (OTC) derivatives. The collapse of leading US financial institutions were blamed on OTC products.
The EU has been following in the footsteps of its US neighbours; new proposals under European Market Infrastructure Regulation (EMIR) are expected to highlight the clearing of swaps between EU counterparties in 2014.