Dealers Prep New Electronic Swaps Trading Platform

By Katy Burne


Despite not having been formally launched, the so-called swap-execution facility, known as Javelin, cleared its first swap on Friday with IDCG, a leading interest-rates clearing platform.

A consortium of dealers is preparing to launch an electronic-trading platform to give over-the-counter derivatives users an alternative to trading privately negotiated contracts on public exchanges under the new financial regulatory regime about to be signed into law in the U.S.

The parties behind the $6 million cleared trade couldn't be determined, but one is thought to have been a government agency, such as Fannie Mae (FNM) or Freddie Mac (FRE). Both have been interested in clearing their interest-rate swaps portfolios to reduce counterparty risk. IDCG didn't return a request for comment.

Derivatives clearing is a service in which a type of middleman--a well-capitalized institution backed by a diverse pool of members--guarantees trades so that parties to those trades needn't worry about the other going bankrupt or otherwise being unable to live up to its contract.

Swap-execution facilities are about to become an important venue for the over-the-counter derivatives market, allowing dealers and customers to buy and sell swaps electronically, maintaining flexibility while fulfilling regulatory reporting requirements as exchanges do.

It remains to be seen exactly what types of existing platforms will fall under the definition of a swap-execution facility, but Javelin was formed by dealers who are betting that their solution will count. The platform doesn't favor any specific clearing houses or technology, and it will accept trades from any party.

A different approach for electronic over-the-counter trading was recently adopted by an exchange called Eris. That venture is backed by five independent proprietary trading firms in Chicago, including Getco LLC, DRW Holdings and Infinium Capital Management, as earlier reported by Dow Jones Newswires.

Eris will clear interest-rate swaps by first converting them to futures contracts.

Javelin, which is also initially focusing on interest-rate swaps, will instead clear swaps as they are. The venture has tapped a pair of derivatives-market veterans for senior management roles.