SEF startup TrueEX LLC has processed over $750 billion bunched order allocations in the past 90 days, overcoming a major hurdle for the buy side in complying with the recent trading mandate for swaps.
TrueEXâs Post-Trade Services (PTS) platform enables futures commission merchants (FCMs) and their asset management clients to execute so-called bunched orders and then perform post-trade allocations to the sub-accounts held at clearing firms.
Since February, when the trading mandate was implemented, the platform has processed nearly three- quarters of a trillion dollars in swaps.
âThis is a huge pain for the buy side on how to do allocations,â said Sunil Hirani, CEO of TrueEX LLC in an interview. TrueEX operates both an exchange approved as a designated contract market and a temporarily registered SEF. âBasically they use legacy systems and now we have provided them an automated way to do this,â said Hirani referring to the buy-sideâs technology for handling allocations.
âOne of the most significant challenges for the marketplace is the allocations workflow and the efficient processing of electronic and voice transactions,â he added. Bunched orders are traded in aggregate and then allocated to underlying funds, on a pre-or post trade basis, depending on the asset managerâs preferences, according to law firm Jones Day.
Post-trade allocations may enable asset managers to achieve best price, increase liquidity, reduce operational risk, and allow asset managers to maximize ease of execution. âInstead of splitting up the bunched order, because you have pre-trade credit check requirements, this is a very efficient way to get their block execution done and then split up after the fact,â said Hirani.
For example, under the new regulatory requirements for trading on SEFs and designated contract markets (DCMs), pre-trade credit checking must take place by the FCM before the trade is executed and accepted for clearing. âIf someone buys a billion worth of 30-year swaps, they put them in a bunch order account. We handle the allocations and then it gets broken up into the sub accounts at the CCPs,â explains Hirani.
âThis allows the buy side to execute in a similar fashion that they are used to in existing futures and equities markets,â noted Hirani.
The bunched orders could be trades that are executed away from TrueEX on other venues, either by voice or by electronic means.
Under the CFTC rule 1.73 FCMs must screen the bunched orders for pre-trade credit checks, a step that leads to real-time trade acceptance with in 10 seconds or less.
âReal-time trade acceptance severely limits breaks and creates confidence that an executed trade is a done trade,â commented Kevin McPartland, head of market structure research at Greenwich Associates. âBut for asset managers that need to allocate executions post-trade to dozens of accounts, real-time trade acceptance creates enormous complexity,â wrote McPartland in an email exchange. âThe situation is particularly complex when a bunched trade is partially filled. The logic required to determine which accounts get which parts of the execution and at which price means real-time trade acceptance is nearly impossible with the current infrastructure.â
A fund manager who does a trade for $100 million and as soon as the trade hits the clearing house, the clearing FCM, checks the credit of that fund and accepts the trade in 10 seconds or less.
However, a more intricate post-trade situation would be an asset manager that executes a bunch trade for 100 funds for $100 million, where the clearing FCM could be different for each fund, illustrated McPartland. Once the trade is done, the asset manager has to decide how much of the bunch order goes to each fund and at what price, he explains. âIf the full order was filled, itâs not that hard, but if itsâ a partial fill, itâs complicated deciding who gets what. It is that complexity that makes real-time acceptance very difficult, said McPartland. âDoing that in 10 seconds is near impossible,â added McPartland in the email.
âA tool to solve that problem will inevitably be welcomed by the buy side. And if itâs available regardless of where the trade is executed, all the best,â wrote McPartland.
TrueEXâs platform is agnostic to execution venues, order types and clearing houses. Other venues tend to provide an allocation service for the trades executed on their own platforms. TrueEXâs platform is open to all of the venues. The PTS platform offers a direct connection to major clearinghouses and can process allocations from any execution venue while providing real-time updates on the allocation status. âThis is helping with the market infrastructure,â said Hirani.