One of the major goals of Dodd Frank derivatives reforms has been to increase transparency into an opaque market where the prices dealers are quoting are not openly visible.
When CFTC Chairman Gary Gensler spoke at a swaps industry conference three weeks ago, he talked about the $400 trillion swaps market moving out of the shadows into the public arena. “Bright lights are now shining on the swaps market. Transparency is shining both prior to and after a trade,” said Gensler, noting that for the first time, dealers and non-dealers alike benefit from transparency.
But in order to attain this level of pre-and post-trade transparency, there’s a lot of data gathering, analysis and visualization that must go along with it.
“Transparency is not only about putting data out there, its making sense of it so that people understand it. We’re helping the understanding and wider adoption than just a complex trade feed,” says Amir Khwaja of Clarus Financial Technology, a technology firm based in London that is designing software apps to bring services to the global derivatives market.
Under US law, Dodd-Frank requires swap trades to be reported in real-time to the DTCC swap data repository (SDR). SDRs, in turn, must disseminate price and volume data. However, just collecting tons of data from SDRs is not enough. Clarus built SDRView app to provide aggregated views, charts, and tables, filtering by product/currency to drill down into the trades. “We take the transaction file and make sense of the trades,” says Khwaja in an interview.
OTC Data Agreement with ICAP
In November, ICAP Information Services, which aggregates pre-trade bid/ask levels across ICAP’s SEF marketplaces for each currency and product once each hour, announced a distribution agreement with Clarus. Under the agreement Clarus will distribute ICAP’s benchmark pricing within Clarus’ SDRView – Professional, including ICAP interest rate swaps, FRAs, OIS Swaps and basis swaps quoted in Euros, US dollars, Australian dollars, Canadian dollars and British pounds.
Clarus is overlaying ICAP's pre-trade prices on its intra-day analysis of SDR aggregated post-trade reporting from DTCC's SDR. “We have one screen where you can see the most recent post-trade price next to the pre-trade ICAP broker price,” he explains.
According to Mark Beeston, CEO of Portfolio Risk Services for ICAP who is quoted in the release, “In the new Dodd-Frank environment, mandated post-trade transparency is a requirement, and the ICAP information on Clarus’ SDRView accurately meets those needs by reflecting price levels at which the market is formulating the ‘next’ trade.”
Currently, Clarus is showing an hourly ICAP price update. If customers want more frequent price updates they would need to pay a higher fee to ICAP. “That’s a cost,” says Khwaja. The professional version has a different price points and has the option to buy ICAP data at a certain cost.
SEF Volumes Could Pick Up Frequency of SDR Price Updates
Although SDRs have been required to disseminate real time prices, it takes a few minutes before the prices are made public, he said. Most trades show up within three or four minutes, according to Khwaja.
Over time, once the SDR reporting improves, and once there are more swap execution facilities or SEFs trading and more SEF volumes, Khwaja expects the SDR prices to be published more frequently.
This will be a huge change since historically, the OTC market trading has been about 5,000 to 7,000 trades per day. “It’s really a low-frequency, high deal size market,” says Khwaja. To make sense of the market, traders need visuals, tables, graphs and charts to see which part of the [yield] curve is trading, he explains. Is it the long or short end? “They want to see the average price, average trade size, which tenor, and how the curve looks in volume terms,” he explains. With a tool like SDRView, users can see how much notional value trades in a given date, something that wasn’t shown before, he says. For example, someone could see that over $30 billion in five-year dollar interest rate swaps traded yesterday, whereas normally about $22 billion trades.
“The idea is that people are quoting prices, and the more information clients have on what has traded and what the brokers are quoting and how far apart the prices are, the better they can negotiate with a dealer,” says Clarus’ CEO. If a client sees a particular swap trade five minutes ago, and then sees a large trade go through that price, it can help both sides negotiate and find the true price, adds Khwaja. This is very important in a market with low volumes, he says. Unlike futures where the price is ticking all the time, the price for swaps moves every so often based on large trades. Now brokers have this information but clients don’t, asserts Khwaja. However, this is changing now with SDR reporting and creating a real-time feed. This is bringing more transparency to clients which will help them find a true market and a true price, he says.
Even so, there many products that trade and to make sense of the data, customers need visual help. Clarus starts by taking the SDR feed, aggregating all the trades and drilling down into all the transactions, including new trades, terminations, corrections and cancellations.
Clarus is also going to each of the 18 SEF sites where they are publishing their volumes by product and producing an aggregated view of market share. At the moment, Clarus is calculating SEF market share once a week, but this could pick up as SEFs evolve and grow their volumes.
What’s more, Clarus is doing all of this outside the normal data vendor channels. Clarus developed its software on the Google cloud platform with Google charts and Google libraries to provide open access to the data with a browser. “The idea is that we want to expand beyond the number of users that license the Bloomberg and Reuters terminal. The traditional data vendors will make this data available on the current data platform. “We’d like to reach a wider audience,” says Khawja.