“We’ve built an auction platform that allows all the dealers to load in all their positions and submit all their curves, and enter what is the fair trading level for the one year, two-year, three year and the four year, etc. for a particular list of reference entities,” he explains. “Their positions are typically the net notional amount they are long or short credit protection at each maturity date and their curves are the dealer’s view of fair trading levels.” In addition, the dealers submit to the platform, the notional amount they are long or short on every point on that curve, continues Dar. For example, they could be net long 20 million on the two-year and net short 24 million on the two and a quarter year, he says.
Typically, Creditex runs the auctions on actively traded names in a particular sector, such as Verizon and Sprint in telecoms, or media, consumer and other actively traded names.
While dealers in North America have resisted adoption of electronic trading for CDS contracts — less than one percent is electronic versus Europe where almost 50 percent of the trading is done electronically — Dar believes that dealers are looking for an electronic solution to this problem.
In the last few months, Creditex has been seeing wide participation in the auctions and very significant amounts that are being traded through the platform, says Dar.
Since all 15 major dealers have links to Creditex, they receive the trades that result from the auction directly back to their trade capture systems, notes Dar. “It’s a great STP story,” says Dar.
Creditex has completed over 500 switches in one auction. “That’s in the span of an hour, not a day,” says Dar. “Imagine if you had manual booking,” he says. “That’s what leads to trade errors and booking errors and delays in getting your confirmations,” he explains.
The firm is “matching thousands of positions up across all credit derivative dealers in multiple reference entities along the curve. Trying to do that process manually with a team of dealers is almost impossible,” says Dar. Several billion dollars of single name CDS notional value is typically traded in each auction.