Q&A with Elisabeth Kirby, Vice President, U.S. Markets, Tradeweb
Clearing of over-the-counter (OTC) derivatives has become a hot-button topic for reform-watchers. Unless the timeline changes, new rules proposed under the Dodd-Frank Act will require OTC derivatives trades to be cleared through a central counterparty in the second quarter of 2012.
That has everyone in the $600 trillion swaps market, from interdealer brokers to clearing houses to dealers to electronic trading platforms asking lots of questions: Will clearinghouses be able to keep up with real-time volume? Will new latencies crimp profit margins? What impacts will increased transparency have on market structure?
For some insight into the ways in which swaps market participants are getting ready to trade in the new regulatory environment, DerivAlert turned to Elisabeth Kirby, vice president,U.S.markets at Tradeweb. Kirby and her team have been working for the past several months on a tech solution to the new clearing challenge. Their Certainty of Clearing solution guarantees that trades will clear by introducing a pre-trade credit-check mechanism into the trading workflow. Kirby explains:
DerivAlert: Tell us about your Certainty of Clearing initiative; what is the goal at Tradeweb?
Kirby: Pre-trade certainty of clearing is meant to provide comfort to the parties of a trade that, once executed, the trade will behave as they expect it to by successfully clearing. Between Dodd-Frank and EMIR, there is little doubt that interest rate and credit default swaps will need to be cleared at some point in the near future. We’re trying to build an efficient solution that lets market participants integrate the clearing process directly into their trading routines.
DA: How does it work?
EK: Essentially, we’re building a pre-trade credit checking mechanism into the swaps trading process. Clearing members will populate Tradeweb with pre-determined clearing limits for each account at the beginning of the day, which they can change day-to-day or intraday. At the time of a trade, the customer will choose a clearing house and clearing member and the trade will be automatically checked against the credit level defined in the system by the clearing member. If it is insufficient, Tradeweb sends a message to the clearing member asking them to approve the trade. If it is not approved, the request-for-quote (RFQ) may still be sent, but it will be noted that clearing approval was not received.
DA: How has the marketplace reacted to your proposal?
EK: The response from both buy- and sell-side participants has been very positive. The industry knows these changes are coming. Whether they come in a few months or over the course of a few years, the market will need to adapt. The key for participants is to preserve the market structure that allows them to profitably trade derivatives. By introducing certainty of clearing, we’re creating a free market solution that doesn’t restrict any activity; it just offers an additional layer of transparency into the credit condition of your counterparties. That’s valuable intelligence in any market.
DA: Is there any concern that securing Certainty of Clearing will add latency to the process?
EK: The big question right now concerning the clearing rules under Dodd-Frank is where the credit-checking mechanism that enables certainty of clearing will be housed. There was initially talk of creating a centralized credit hub, but it is unclear who would build this and how long it would take to become operational. Another option is to house the credit-check function at the clearing houses themselves, but there are fears of increased latency in that scenario. The third option is to house the credit-check mechanism at the SEF level.
We believe this is the most efficient choice for the marketplace. Our Certainty of Clearing solution sets the stage for us to be able to deliver seamless credit-checks that are integrated directly into the trading workflow, while leveraging our existing connectivity to the clearing houses. Market participants like that we’ve come up with something that’s scalable for whatever the regulations bring, but not restrictive in terms of workflow or disruptive to market structure.
DA: What is your timetable for implementation?
EK: The clearing portion of financial reform is expected to be phased in over a period of nine months starting in mid-2012. However, we expect to have our Certainty of Clearing solution up and running with clients well in advance of the rule implementation.
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