Liquidity Builds In First Dealer-to-Client CLOB For Swaps

Liquidity is building in the first dealer-to-client pure electronic central limit order book for interest rate swaps with trades increasing and 12 institutions preparing to onboard.

Trad-X, the platform for interest rate derivatives, launched the multi-lateral trading facility last month.

Dan Marcus, Trad-X

Dan Marcus, chief executive of Trad-X, told Markets Media that a central limit order book levels the playing field so everyone has equivalent access at the same price and the same levels of information, with no tiered pricing. Trad-X’s D2C venue provides an alternative to the traditional request for quote protocol and allows non-dealers to access pricing for a wide range of products from multiple dealers more quickly and cost effectively.

“This model provides a real alternative for buy-side clients when trading standardized products,” said Marcus.

Aegon Asset Management was the first buy-side institution to execute a euro interest rate swap on Trad-X’s D2C central limit order book. BNP Paribas was the counterparty, and the transaction was cleared by Deutsche Börse Group’s Eurex Clearing.

Derek Milner, senior portfolio manager at Aegon Asset Management, said in a statement: “Trad-X’s central order book for non-dealers lowers barriers to market entry and we are pleased to be the first institution to complete a trade with a dealer on the platform. We believe the main advantages of this platform are certainty of execution, anonymity and access to offsetting non-dealers’ exposures.”

Marcus continued that Trad-X’s D2C central limit order book had four market makers and five clients at launch, but this has since increased. The MTF has objective criteria to classify a participant as either a client or a dealer, not both. Dealers can only supply liquidity to clients and cannot trade with each other.

He said Commerzbank is the latest to join as a dealer, while DekaBank is a client.

“There are another 12 trading institutions in the onboarding process, so we expect liquidity to build,” Marcus added.

The institutions who will join in the coming weeks and months include tier 1 banks seeking to join as dealers, and non-dealers including small banks, hedge funds, asset managers and pension fund clients.

Market makers have an obligation to constantly stream prices to ensure that there is always a two-way price for clients to hit at any time of the day, or they can sit in the book with a passive bid/offer.

“Clients get immediate execution and central clearing through Eurex,” Marcus said. “We are in discussions with other CCPs to potentially extend our offering to them, as we embark on the next stage of growth.”

Volumes of trades are in double figures but Marcus continued that it is still very early days for the platform.

“We will have a better indication by the end of the first quarter whether the proof of concept works and where there is market appetite,” he said.

Philippe Dudon, Trad-X

Clearing

Phillipe Dudon, chief operating officer at Trad-X, told Markets Media that direction of travel is clear in terms of the buy-side wanting cleared products.

In addition, the next phase of the uncleared margin rules is expected to lead to more demand for clearing. The next phase comes into force in September this year and more buy-side firms will be covered by the regulation which means they will have to exchange margin on uncleared derivatives contracts for the first time.

Phil Simons, global head fixed income sales – derivatives, funding & financing at Eurex, said in a statement: “It’s very encouraging to see platform initiatives such as Trad-X D2C CLOB gain momentum, as they are essential components in establishing Eurex as the home of the Euro across listed and over-the-counter derivatives. As well as enhancing execution options, this is consistent with our goal to help our members and clients reduce costs and increase efficiency through combining automated execution with integrated cross product clearing and collateral management.”

Dudon said Trad-X has built good relationships with the buy-side with regards to helping them move forward with their business.

“We have identified areas of possible expansion including a wider range of products, reporting and analytics,” he added.

He continued that the swap market is getting larger each year and needs more liquidity. “We expect this to be driven by electronic trading,” said Dudon.

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