TrueEx: A True Alternative Swaps Post-Trade Provider?

Does the swaps market really need another standalone post-trade service provider?

That’s the question emerging from trueEx’s announcement that it has split off its post-trade services from its swap execution platform for interest rate swaps.

The answer: it isn’t clear. It could well-be that the new truePTS will offer “next-generation” services as TrueEx’s Chief Executive Sunil Hirani ardently claims. However, based on the scanty details he is willing to provide through his press release and written responses to emailed questions, it’s hard to say. As is the case with many entrepreneurial initiatives, time will either be a friend or enemy.

Derivative operations managers at several fund management firms contacted by FinOps Report claim that trueEx PTS has fixed its sights squarely on MarkitSERV, which also only provides independent post-trade services. It is not part of any swap execution facility (SEF). SEFs Tradeweb and Bloomberg, which operate successful dealer-to-customer platforms, also provide post-trade services for users of their trading platforms. MarkitSERV, Tradeweb, and Bloomberg didn’t want to discuss trueEx’s announcement.

“Sunil is known for being an innovator,” says one fund management derivatives manager citing trueEx’s origins. “We’re just waiting to find out more details on what’s up his sleeve.”

TrueEx was founded by the same team led by Hirani that founded Creditex, the first electronic trading platform for credit default swaps, and its post-trade subsidiary T-Zero which was spun off from Creditex in 2005. Both were sold to the InterContinental Exchange for $625 million in 2008. The news about truePTS was also quickly overshadowed by a separate announcement about trueEx’s launch of trueFIX, a real-time automated execution and processing solution for all US dollar, euro and UK sterling denominated interest rate swaps with direct connectivity to CME and LCH Clearnet for clearing.

All of the participants on trueEx and trueFIX will be able to use truePTS, Hirani publicly says, but the separation of the post-trade business from the execution platform will allow it to be used by other market participants such as dealers, buy-side firms, futures commission merchants and even other execution platforms. Nineteen dealers are now using the year-old trueEx, as well as 73 buy-side firms and twelve clearing firms.

All of the five derivatives operations specialists at buy-side firms who spoke with FinOps acknowledge that Hirani may have a tough sell promoting truePTS. Granted, it will have a captive market of users of trueEx and potentially trueFIX, but Tradeweb and Bloomberg have a strong lead as the predominant dealer-to-customer platforms. MarkitSERV also has a mega following: over 1,000 broker-dealer and fund management customers based on its public statements. It does not split out users by industry sector.

What does Hirani say about his rivals? Although he never cites them directly, in his written responses to questions posed by FinOps, he claims the following: “There are no independent post-trade services provider that delivers the same range of services to the entire marketplace. Proprietary services are not targeted at clients that trade away from their platform.”

Just what does the new trueEx post-trade service firm offer that MarkitSERV doesn’t? Based on the information MarkitSERV offers on its website it is difficult to tell. It says it offers the full trade lifecycle management for interest rates, credit default swaps, equity derivatives and foreign exchange derivatives. Granted, fund management and other firms, which use Tradeweb and Bloomberg’s post-trade services must trade on those platforms, but Hirani doesn’t elaborate on the shortcomings of such a scenario. Fund management firms, which trade on a limited number of SEFs, may well prefer to use the same platform for post-trade processing.

In another slam at MarkitSERV and other competitors, Hirani also says that “other-dealer controlled platforms simply add to the post-trade processing burden rather than seeking to eliminate steps such as trade affirmation in the process.” TrueEx clearly is trying to capitalize on the discontent voiced by buy-side firms about the delay they have experienced in sending derivative trades executed on SEFs to clearinghouses, because of the intermediary extra step of trade affirmation. One of MarkitSERV’s services is a an affirmation hub known as MarkitWire.

Buy-side firms complain that the affirmation process is controlled not by SEFs, but by dealers who want to know the true identity of the buy-side firm’s counterparty. Dealers tell SEFs to send executed trades to an affirmation hub. Although auto-processing — or not using affirmation — is a step available on most SEFs, that’s not common practice. Hirani’s statement appears to imply to truePTS offers auto-processing, so trades don’t have to be affirmed.

In his press comments, Hirani also alludes to his offering fund management firms end-of-day average pricing in the future. Just what is that? Its the ability of a fund management firm to allocate a block trade to different underlying fund management firms using the same price. Such a scenario, fund management firms say, can only exist if the fund management firm relies on a request-for-quote process of trading and not a central limit order book. Therefore, fund management firms typically trade on an RFQ basis. TrueEx also operates a central limit order book.

Hirani could well be working behind the scenes with clearinghouses to come up with a way to offer fund managers average pricing for central limit order book trading, but when asked by FinOps to comment on whether he could have an edge over competitors doing the same, he responds; “TrueEx has been at the forefront of innovation over the past couple of years and rather than seeking to protect the status quo, is developing ways to improve the process for the entire market ecosystem. We are aiming to provide the next generation processing services that are sorely needed in the marketplace.” Fund managers who spoke with FinOps predict that MarkitSERV, Tradeweb and Bloomberg will also be eager to offer average pricing.

When FinOps posed the question: why should fund management firms use your service over the existing ones available, he writes: “We are execution, clearinghouse, product and FCM/client agnostic. We provide direct access to clearinghouses as well as instant clearing status.” Hirani doesn’t disclose how many clearinghouses, but CME and LCH Clearnet are cited on its press statement.

Will this rather sketchy information be enough to get fund management firms to switch from their current post-trade facility to truePTS? The fact that trueEx seems to be playing its cards close to the chest may be understandable, given the highly competitive swaps services environment, and even work in its favor. Considering the traction trueEx has gained in only a year and Hirani’s track record in building technology platforms, a bit of secrecy now could be suggestive of more substantial news to come.