Creating a standardised TRS market
08 November 2022
Digital technologies will be a critical enabler in meeting a growing demand for the Total Return Swaps market to be standardised and industrialised. Wematch’s co-founder and head of EMEA David Raccat explores the future TRS ecosystem and the opportunities it presents
Image: David Raccat
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 past 20 years.
Drivers for TRS market standardisation
There is now strong momentum for change. In our discussions with financial institutions around the world, we are hearing growing demand for a large part of the TRS market to be standardised and industrialised.
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, 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 standardising 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, standardisation marks a natural evolution for the large swathes of the TRS market that do not require bespoke interventions. The vision is for a TRS market that is normalised and efficient, where data is, therefore, reliable, accurate and more easily challenged from a regulatory, capital and market risk standpoint.
The role of digitised workflows
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 industrialised model for the market.
Soon, the entire TRS market will be underpinned by a single, end-to-end platform that both automates and optimises workflow and improves the way market participants communicate externally and internally. This digitised 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:
• interest matching. The matching process becomes digitised and automated, making it easier and faster for dealers to send and receive indications of interest for swaps. Historical and live data is combined with smart negotiation protocols to navigate collateral schedules and conditions, providing dealers with access to the best trading opportunities every time.
• lifecycle management. Integrated tools for any type of trade event, including rate changes, recalls and substitutions make lifecycle management exponentially easier.
• collateral optimisation. Dealers need only set rules for the platform to then carry out all the heavy lifting, leveraging automated processes with the ability to send notifications to multiple counterparts with one single click.
• sales to trader. Internal communications are improved with seamless workflow between sales teams and TRS dealers, including the ability to make tailored outputs for clients.
• synthetic ETFs. Workflow is streamlined across UCITS management, substitutions, and collateral optimisation, with the ability to manage multiple issuers, master funds and funds simultaneously.
• cash-flow reconciliations. The cumbersome reconciliation of cash flow data related to the performances of the equity and funding legs of equity swaps is alleviated through automated workflows, and discrepancies can be identified at the outset, which will dramatically increase efficiency.
• enhanced regulatory reporting. Digitised workflow delivers a complete audit trail of transactions to improve trade observability and inform regulatory reporting.
Build the future
Given the demand for a more standardised 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 option, 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 is more, the digital marketplace approach needed for features such as 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 standardisation required by the industry, what is needed is something different to the usual vendor approach. What is really being created is the technical underpinnings of TRS ecosystems, whether that is 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. This ensures continual improvement that closely aligns to what market participants need the most.
An evolving market
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 standardised 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 is 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.
It is exciting to note that the technology enablers for this future are already available. What is more, given the conversations that we are having with financial institutions in Europe, the US and Asia Pacific, it is clear that the appetite for change is also in place 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.
Drivers for TRS market standardisation
There is now strong momentum for change. In our discussions with financial institutions around the world, we are hearing growing demand for a large part of the TRS market to be standardised and industrialised.
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, 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 standardising 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, standardisation marks a natural evolution for the large swathes of the TRS market that do not require bespoke interventions. The vision is for a TRS market that is normalised and efficient, where data is, therefore, reliable, accurate and more easily challenged from a regulatory, capital and market risk standpoint.
The role of digitised workflows
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 industrialised model for the market.
Soon, the entire TRS market will be underpinned by a single, end-to-end platform that both automates and optimises workflow and improves the way market participants communicate externally and internally. This digitised 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:
• interest matching. The matching process becomes digitised and automated, making it easier and faster for dealers to send and receive indications of interest for swaps. Historical and live data is combined with smart negotiation protocols to navigate collateral schedules and conditions, providing dealers with access to the best trading opportunities every time.
• lifecycle management. Integrated tools for any type of trade event, including rate changes, recalls and substitutions make lifecycle management exponentially easier.
• collateral optimisation. Dealers need only set rules for the platform to then carry out all the heavy lifting, leveraging automated processes with the ability to send notifications to multiple counterparts with one single click.
• sales to trader. Internal communications are improved with seamless workflow between sales teams and TRS dealers, including the ability to make tailored outputs for clients.
• synthetic ETFs. Workflow is streamlined across UCITS management, substitutions, and collateral optimisation, with the ability to manage multiple issuers, master funds and funds simultaneously.
• cash-flow reconciliations. The cumbersome reconciliation of cash flow data related to the performances of the equity and funding legs of equity swaps is alleviated through automated workflows, and discrepancies can be identified at the outset, which will dramatically increase efficiency.
• enhanced regulatory reporting. Digitised workflow delivers a complete audit trail of transactions to improve trade observability and inform regulatory reporting.
Build the future
Given the demand for a more standardised 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 option, 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 is more, the digital marketplace approach needed for features such as 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 standardisation required by the industry, what is needed is something different to the usual vendor approach. What is really being created is the technical underpinnings of TRS ecosystems, whether that is 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. This ensures continual improvement that closely aligns to what market participants need the most.
An evolving market
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 standardised 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 is 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.
It is exciting to note that the technology enablers for this future are already available. What is more, given the conversations that we are having with financial institutions in Europe, the US and Asia Pacific, it is clear that the appetite for change is also in place 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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