Historically, the Total Return Swaps (TRS) market has been highly bespoke. Each trade is essentially unique, based on the nature of the seller’s constraints and the buyer’s inventory. The face-to-face relationships of dealers and brokers have been key, and workflow is still dominated by multiple manual processes. For most TRS trades, phone and chat are still the main tools of business, and trading processes have changed little in the last 20 years.
What follows is a transcript of an interview with Securities Finance Times published in Nov 2022.
However, there is now strong momentum for change. In our discussions with financial institutions around the world, we’re hearing growing demand for a large part of the TRS market to be standardized and industrialized.
In part, this trend is being driven by the need to comply with regulations, such as the Fundamental Review of the Trading Book (FRTB), which mandates that trades should be observable and that they should improve capital treatment and have a positive impact on the balance sheet.
More broadly, firms are looking to reduce the risk that comes from operating in a bespoke market. The more complex the term sheet, the greater the risk. There is also a significant cost consideration: by standardizing the TRS market, financial institutions stand to reduce expenses and generate capital and balance sheet improvements.
Having already delivered significant operational improvements in asset classes such as foreign exchange, interest rates derivatives, and some equities products, standardization marks a natural evolution for the large swathes of the TRS market that do not actually require bespoke interventions. The vision is for a TRS market that is normalized and efficient, where data is, therefore, reliable and accurate and more easily challenged from a regulatory, capital, and market risk standpoint.
As banks and dealers push the TRS market towards this future, digital technologies will be a critical enabler. By replacing manual trading workflows and inefficient communications protocols with digital alternatives, TRS market participants can rapidly move towards a more industrialized model for the market.
Soon, the entire TRS market will be underpinned by a single, end-to-end platform that both automates and optimizes workflow and improves the way market participants communicate externally and internally. This digitized approach will create a TRS ecosystem that unlocks significant efficiencies while making dealers much more productive. With powerful algorithms at the heart of TRS workflows, dealers will be able to benefit from improvements in areas such as
Given the demand for a more standardized TRS market, firms that have not yet adopted digital dealing workflows soon will. As always, firms face a choice over whether to build these tools for themselves or buy them from platform vendors. There is a third way, however, which combines the control provided by in-house builds with the cost efficiencies that come with vendor systems.
Companies like Wematch.live are increasingly looking to co-create their platforms in collaboration with market participants. The advantages of doing so are clear. To make a platform that is truly end-to-end, and which meets the needs of all market participants, collaboration with users is vital. What’s more, the digital marketplace approach needed for features like automated matching lends itself best to a single, one-stop-shop approach where new capabilities are made available to all users equally.
To achieve the levels of standardization required by the industry, what’s needed is something different to the usual vendor approach. What’s really being created is the technical underpinnings of TRS ecosystems, whether that’s of an external marketplace or an internal collaboration zone. Continual quarterly feedback from users, such as Wematch sources in our TRS Forums, then helps inform the feature roadmap for the months ahead ensuring for continual improvement that closely aligns to what market participants need the most.
As anyone in the TRS market knows, there will always be trades where a bespoke approach is required. However, for a large proportion of the market, the legacy approach is highly inefficient. Why create a new framework for every single trade where most can be conducted faster and cheaper by leveraging digital and automated workflows? Doing so creates a standardized model for the market where data is much better suited for analysis and regulatory reporting. To compare apples with apples, you first need an apple tree – and that’s what an end-to-end digital TRS ecosystem promises to provide. The result is more observable trades, faster working processes, improved communication with internal teams, and better data insights into trading activities.
Excitingly, the technology enablers for this future are already available. What’s more, given the conversations we’re having with financial institutions in Europe, the US, and Asia Pacific, it’s clear that the appetite for change is also in place right across the world. A new phase in the story of TRS trading is about to start, and it promises to bring with it unprecedented efficiencies for the firms involved.
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