Traiana and MarketAxess have completed the first live credit default swap (CDS) index trade using Traiana's CreditLink service as the credit hub to verify pre-trade credit limits.
Under the Commodity Futures Trading Commission (CFTC) swap execution facility (SEF) rules a clearing member must carry out pre-trade credit checks on trades prior to execution.
“This is an important first for the industry that was two-plus years in the making,” said Nick Solinger, head of product strategy and chief marketing officer at Traiana. “Dodd-Frank laid out a new structure for multiple aspects of OTC trading, such as execution, reporting and clearing. One of the requirements for SEFs is that every trade has clearing certainty. This is a very difficult goal to achieve, requiring tight integration of clients, trading venues, clearing members and clearinghouses.”
CreditLink acts as a centralized hub and provides trading platforms, clearers/prime brokers, executing
banks and buy-side firms the ability to monitor and manage pre- and post-trade credit in real-time across multiple trading venues in a consolidated view.
MarketAxess is the first trading platform to have been granted temporary registration as a SEF to be fully integrated and live with CreditLink, and the first platform on which a live trade was conducted with pre-trade credit checking via a credit hub.
JP Morgan acted as the clearing member for the major buy-side participant on the trade. "Our clients require efficient and effective pre-trade credit checking processes," said Andres Choussy, global co-head of OTC clearing for J.P. Morgan. "In volatile markets, you can't afford to have your trade cancelled post execution, which is why we will continue working with Traiana, MarketAxess and the broader industry to ensure that each party to an electronic transaction has clearing commitments from their FCMs and the clearinghouses before their trade is executed."
The trade represents the significant investment the entire industry has made into ensuring the transition to SEF trading is smooth for clients.
"The completion of this trade with a major buy-side participant and JP Morgan, using Traiana as a credit hub, is an important milestone in the implementation of the new SEF rules,” said Kevin McPherson, head of U.S. sales at MarketAxess. “A seamless credit checking process is critical in helping participants maintain liquidity in the swap markets. We have been working hard with all of the participants on our platform and the industry as whole to ensure the necessary infrastructure is in place well ahead of the SEF trading mandate."
CreditLink provides trading platforms, clearers/prime brokers, executing banks and buy-side firms the ability to monitor and manage pre- and post-trade credit in real-time across multiple trading venues
in a consolidated view. It supports all trading models across FX, exchange traded derivatives, CDS and fixed income and serves hundreds of buyside, broker, prime-brokers and trading venues.
“The nuances of the regulations and the unique risks presented by the new trading model required us to invest heavily in enhancing CreditLink,” said Solinger. “We, together with our clients, have invested massive amounts to address the specifics of SEF trading.”
The CFTC requires that clearing members, i.e., FCMs, define credit limits for clients based on the risk that the instruments represent and the ability of the client to effectively fund the trade.
“Each FCM employs their own risk management methodologies, including position-based and product-based limits,” Solinger said. “We accommodate to a great degree the range of methodologies that the clearing community is employing.”
