What trueEX can teach us about the future of securities finance (Premium Content)

We’ve been watching trueEX for a while, and a recent hire of a former securities lending professional sealed the deal: this start up could potentially teach securities finance a lesson or two, or even three. Here’s what we’re seeing:

trueEx is an electronic trading platform for OTC swaps. The thing that makes it interesting is that it effectively allows the buy-side to trade directly against each other without sell-side involvement in setting prices. Under the US CFTC, its both a Designated Contract Market and a Swap Execution Facility (SEF). According to trueEX’s website, the firm provides “pre-trade certainty of execution and clearing, trade anonymity, pre-trade and post-trade transparency, as well as low cost execution for the interest rate swaps market. Open architecture enables customers to connect directly to trueEX via our proprietary user interface or API connection. Additionally, trueEX is clearing house agnostic and provides customers with a choice of clearing firms and clearing houses for their derivatives business.” The comparison to securities finance is already pretty clear. While securities finance has some of these elements some of the time, none of them extend to the buy-side, and that’s where things are heading.

Here are some features we see in trueEX that we expect to see from an electronic market in securities finance:

A Central Limit Order Book (CLOB). AQS already does this for the US buy-side and repo platforms in Europe like MTS are highly functional. The lessons of Electronic Communications Networks (ECNs) show us however that CLOBs are drawn from a variety of sources. trueEX clients “are able to view liquidity across all supported clearing houses, including market depth.” Imagine a CLOB that draws in the buy-side across dealers. Its been imagined before but it doesn’t exist yet in many markets.

An emphasis on technological sophistication. The SEF part of trueEX offers a series of bells and whistles for the OTC derivatives market that could be leveraged for the securities finance market by trueEX or other vendors. The part we see is the ability to move trades onto different clearinghouses or potentially bilaterally using the system as the operational tool. For example, if a securities loan were priced out one day bilaterally, but the next week it was better from a capital or netting perspective to run the loan through a CCP, that would straight-forward to do.

Data. trueEX offers public data on the markets that they trade in. Like securities lending, these OTC derivatives markets have traditionally been opaque. Offering up public execution and trade volume data is pretty interesting. Some markets linked to securities lending like OneChicago do this for single stock futures, but no facility does it so publicly for securities lending.

Users. “Participant users on the trueEX platforms include swap dealers (SDs), major swap participants (MSPs), and other financial and corporate entities. SDs, also known as market makers, are generally large financial entities that make swap markets by providing pricing against orders offered by the other two participant user types. MSPs are mostly hedge funds, asset managers, insurance companies, and other entities which have substantial swap holdings.” The trueEX model relies on Futures Commission Merchants (FCMs) to clear trades. In securities finance, with buy-side access coming to CCPs, maybe this last step will be unnecessary. The point is that the trueEX platform is open to everyone who could possibly participate.

Maybe trueEX has something to learn from securities finance as well. Former eSecLending Co-CEO Karen O’Connor recently joined the firm as COO. Other management at trueEX have deep industry experience, a theme consistent with our finding in our May 2014 research report, “Emerging Technologies in Securities Finance and Collateral Management,” that the most likely successes in IT start ups in securities finance come from teams with substantial industry backgrounds (Finadium full research subscribers with Finadium.com logins can log in to access this report.)

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