There is strong demand from buy-side institutions for a solution that will reduce the cost of having to set themselves up to trade interest rate swaps through regulated venues and clear through CCPs and maximize the efficiency of the necessary arrangements.
Alternative swaps market structures that are appropriate for the new regulatory landscape are now being discussed, and a number are being actively explored. One particular alternative attracting considerable discussion is the use of prime banks offering sponsored electronic access.
While the sponsored access model has existed in other markets for a number of years, the technology now exists in the interest rate swaps markets to capitalise on the potential benefits of this model by enabling instant communication between both the sponsor bank and its customer, and the sponsor bank and the rest of the market.
As a result, sponsored electronic access through a prime bank looks set to be a viable alternative and an important step forward in improving cost control and efficiency whilst enabling orderly, efficient access for all participants.
[The Exchange Diversification Play]
To this end, MTS has recently launched MTS Swaps, a new platform that gives buy-side institutions the ability to trade interest rate swaps electronically via a sponsor bank, giving them access to the best prices available in the market while allowing them to maintain and strengthen their relationship with their chosen prime bank. A number of banks, including BNP Paribas, Commerzbank, Credit Agricole, HSBC, Lloyds, Societe Generale and UBS have supported the platform from launch.
Other benefits of applying the prime brokerage model to the interest rate swaps markets include:
• Simplified reporting and documentation requirements for buy-side institutions trading swaps via SEFs or OTFs
• Improved market efficiency in the execution and post trade management of swaps
• Consistency with regulatory reforms in Dodd-Frank, MiFID II and EMIR, improving pre- and post-trade transparency for all market participants
• An increase in trading activity as buy-side participants gain instant access to better prices and deeper liquidity pools through their prime brokers. This model critically preserves and enhances the relationship between the buy-side customer and their prime broker, respecting and developing the role of each in the successful operation of the market
• It connects investors to all points of liquidity simultaneously and anonymously giving fair and equal access to the best prices available in the market at all times
• Banks are able to leverage existing relationships and enhance customer retention through best execution
• It increases a bank’s flow business, and provides economies of scale for the back office in terms of clearing and settlement
In short, sponsored access offers an opportunity for the regulatory objectives relating to interest rate swaps to be achieved without damaging important buy-side and sell-side relationships. These relationships provide benefits in a range of functions, not just provision of credit, and contribute to a more efficient market.
Roger Barton is the Regulation and Market Development Advisor at MTS.