Clients to Benefit from Increased Price Transparency and Liquidity
State Street Corporation (NYSE: STT), one of the world’s leading providers of financial services to institutional investors, today announced the expansion of its end-to-end derivatives solution to include an execution platform for the trading of derivatives products. The launch of this swap execution facility (SEF), SwapEx, coincides with the 2012 implementation of significant regulatory changes in the United States and Europe. State Street’s comprehensive derivatives solution already includes clearing, servicing, custody and accounting, collateral management, valuation, and risk and analytics.
As the Dodd-Frank Act and similar measures under European Market Infrastructure Regulation (EMIR) and Markets in Financial Instruments Directive (MiFID) are adopted, the large majority of swap contracts currently traded over the counter (OTC) directly between two parties will migrate to multi-party electronic trading platforms, creating greater price transparency and increased liquidity as more participants enter the market. SwapEx provides the first step in a global end-to-end solution that reduces operational risk through the automation of the many stages of derivatives processing, including execution, clearing, collateral management, cash and securities flows between the middle and back offices, transaction cost and risk reporting, valuations, and the reconciliation of positions. State Street plans to file its SwapEx registration with the United States Commission Futures Trading Commission (CFTC) when the application window opens later this year. In preparation for the launch, State Street has entered into an agreement with National Futures Association (NFA) to perform regulatory services for State Street’s SEF.
“The derivatives market is in the midst of significant change as it moves away from a bilateral trading model to a centrally traded and cleared environment that offers greater price transparency, liquidity and enhanced risk management,” said Clifford Lewis, executive vice president and head of the eExchange business at State Street. “State Street’s core competencies as a custodian combined with the advanced technology of our eExchange platforms, including SwapEx, make the expansion of our derivatives solution to include a swap execution facility a natural extension of our business.
“Through State Street’s comprehensive derivatives solution, buy-side clients will have a centralized means for trading, clearing and processing their swap positions, managing the related collateral demands, allocating, reconciling and accounting for their positions, automating manual processes, and helping to reduce operational risk,” said Jeff Conway, executive vice president and head of Investment Manager Services at State Street. “This initiative is a strategic priority for State Street and emphasizes our commitment to providing solutions for our clients’ changing needs in an evolving marketplace.”
Key functionality of the SwapEx platform will include:
• Advanced technology and processing speed leveraging the Currenex, FX Connect and GovEx execution platforms
• Automated post-trade capabilities, leveraging State Street’s existing infrastructure
• Multiple execution styles to accommodate each client’s preferred method of execution: a central limit-order book, request-for-quote, both fully disclosed and anonymous, indications of interest and auction capabilities
• Portfolio compression available through request-for-quote and indication of interest execution styles that allow for the ‘tear up’ of positions
• Multi-asset class capabilities, including swaps, treasuries and futures utilizing State Street’s platforms as well as third-party platforms such as Eris Exchange
State Street added to its end-to-end derivatives solution in 2011, expanding its futures commission merchant services to cover swap clearing capabilities, as these products will move into a centrally cleared environment through established Central Clearing Counterparties (CCPs). Parties to these trades will be required to work through a clearing broker that acts as intermediary between its clients and the CCP. The new regulations will also impose collateral requirements and real time reporting requirements designed to reduce counterparty credit risk and bolster market transparency.
The derivatives clearing offering combines the expertise of eExchange, a division of State Street Global Markets and State Street Global Services. eExchange delivers advanced trading solutions for foreign exchange, futures, US treasuries, and the subscription and redemption of money market funds and exchange traded funds. State Street Global Services provides asset owners and managers with a wide range of support, from core custody, accounting, fund administration and shareholder recordkeeping to complete investment operations outsourcing solutions and servicing for complex alternative assets like OTC derivatives, hedge funds, private equity and real estate.
