4sight: Swaps desks look to boost tech capabilities

4sight: Swaps desks look to boost tech capabilities

A growing number of investment banks and asset managers are looking to enhance their synthetic finance capabilities, 4sight finds, amid growing swaps volumes across Asia, US and European markets

Trends in Synthetic Finance Technology

Swaps volumes are continuing to increase in Asia, US and European markets due to their balance sheet efficiencies, particularly since regulations such as capital and leverage ratio rules have become a binding constraint on sell-side banks. Swaps also remain popular in emerging markets where they are used for market access purposes. Further to the increase in volumes, there has been an increase in the number of participants in the synthetic finance space as new players emerge.

Survey Data

A survey in 2015 of 56 market participants carried out by swaps technology provider 4sight and consultancy The Field Effect revealed that 32% of participants are currently booking Synthetic Financing transactions such as Total Return Swaps and Portfolio Swaps.

A further 18% plan to in the near future. Firms surveyed included a range of tier one and tier two investment banks and asset managers. 

The survey also found that:

• 28% of participants had no technology systems in place for synthetic finance but had plans to install them

• 19% had a technology system in place but it was not yet mature

• 8% had systems in place that were both mature and cost effective

• 84% of respondents rated their current technology systems as average, poor or very poor

• Only 16% rated their technology systems as good or excellent.

Technology Requirements

Given the complexity of synthetic trading and reduced profit margins in the current regulatory environment, state of the art technology solutions will be a key differentiator for prime brokers and other market participants. Solutions that offer efficient processing of both synthetic and physical trades are a critical component in running a profitable trading strategy.

Systems that simplify the complexity of the equity swaps lifecycle while increasing automation and straight through processing are now fundamental to managing costs and enhancing client service offerings.

On the buy side, larger hedge funds and asset managers may also benefit from deploying technology solutions for managing synthetics. As volumes increase, the operational overhead to manage the resulting lifecycle events and processing quickly becomes difficult to manage in a manual world.

Broker-dealers will find it easier to trade with counterparties who have efficient processes for managing the operational lifecycle of synthetic transactions. Software as a service solutions can also add value for these firms without significant spend on hardware and IT infrastructure.

Technology Cost Reduction

Business revenues now have a flatter curve than in previous decades. One way firms can maintain profit margins is to reduce technology costs. In this instance, a cost-effective vendor solution can be preferable to the high-cost of internal headcount and infrastructure required to manage in-house solutions.

4sight Swap Solution

In response to these market requirements, 4sight Swap offers:
• A single system solution providing fully global, multi-entity, multi-region support.
• A core swaps engine that is specifically designed and optimised to manage the highest volumes and most complex multi-underlying swaps
• Low touch, high STP of events across the entire swap lifecycle, reducing manual intervention and enabling users to increase trading volumes and reduce operational risk.
• Full integration with 4sight’s Repo, Collateral Management and Securities Lending and Borrowing modules, allowing for swap system integration with all aspects of bond and equity financing, margining, borrowing and risk analysis for balance sheet, liquidity, credit risk and capital costs.
• A cost effective, quickly integrated solution with a market-standard SOA architecture.

Holistic Model

A trend is also emerging for a more holistic approach to managing both physical and synthetic trading activities, particularly among the larger sell-side banks. This has largely been driven by an increased focus on risk management and the need to optimise efficiency in balance sheet usage, liquidity and capital consumption.

Having this top-down view of physical and synthetic trading activity, coupled with a centralised collateral and liquidity management function, allows the firm to quantify, analyse and allocate resources in a way that reduces costs and helps to generate the greatest return on equity for the firm.

In addition to these new considerations there is an obvious advantage to having a firm’s synthetic and physical client offerings and exposures in one system e.g. having Prime Brokerage equity flow swap and SBL exposures in the same system so that users can cross reference client positions and rates at a glance.

Furthermore, a holistic view enables the firm to identify opportunities for cross margining as well as netting efficiencies whilst identifying ways to match asset flows across the firm in a more optimised way.

While this trend is only just emerging in the market, we may see it gathering pace as new regulations begin to bite and forward-thinking market participants look at ways to adapt to the new environment.

This article is an excerpt from a 4sight and The Field Effect whitepaper, Synthetic Finance: Target Operating Models and Technology Challenges. The full paper can be accessed from: www.4sight.com/products/4sight-swap/synthetic-finance-whitepaper 

Most Popular

Thought Leaders

Constant change in prime brokerage shines the spotlight on proven, trusted partners

By Paul McGuigan, Scotiabank’s European Head of Securities Lending

Leveraging new initiatives and innovation in securities finance

By Bill Kelly, Global Head of Agency Securities Finance at BNY Mellon Markets

Emerging markets securities lending update

eSecLending's Ed Oliver provides an update on securities lending in emerging...

Pirum in the Americas: An evolving company in complex times

Nancy Steiker, head of business development, Americas, Pirum

HSBC: Navigating EM complexities through customisation

Matt Kiraly and Murat Demir discuss emerging market trends in Latin America.