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Equity Swaps : the acceleration to automation
Ryan Spencer , senior director and head of securities business development at Traiana , outlines how automation and centralised processes can revolutionise the equity swaps market .
To say it has been a roller coaster ride for equity markets last year would be perhaps the biggest understatement of 2020 . While global equity markets remained open through the lockdowns , this did not stop widespread concerns about how firms would handle the logistics of working from home and the impact on operational processes and settlement risks . Firms began to look at their vendors to hold up and maintain business continuity across multiple asset classes with Traiana being the key t-zero network for the trade processing and clearing of equity swaps .
Trade processing and settlement risks in the pandemic The knock-on effect of the pandemic led to firms focusing risk occurring further downstream including the agreement of equity swaps trade and the cashflows generated by ‘ swap ’ lifecycle events such as resets , unwinds and corporate actions including dividends .
These issues have been a persistent thorn in the side for buy-side and sell-side firms for many years .
Traditionally , it is the responsibility of the buy-side to notify the swap providers of any breaks across the trade , valuation and payments reporting stack . However , often there are many breaks amend requests during the reset periods when the swap valuations are finalised , and cash is moving into the prime or custodial accounts .
Reduce daily valuation and settlement risks These resets and cashflow amounts can run into multiple millions of each swap currency for the larger equity focused investment managers . On the flip side and if , for example , a major investment bank has 400 buyside clients , and 200 of them are coming in at month-end for resets , while the other 200 are coming in mid-month with their resets , then the bank has a fundamental risk concern . The more time it takes buy-side firms to sift through their reports to identify the magnitude of the breaks , the bigger the resource and cost burden .
A key question facing the industry in 2021 is how exactly can banks and their clients overcome operational challenges around mis-bookings and cashflow related breaks in order to reduce daily valuation and settlement risks , and tighten operational processes whilst maintaining healthy trading relationships ?
Identify , track and resolve breaks One of the key factors is the sheer number of different break types . From a missing trade to a break in the execution price or financing spread , not to mention booking trades into the wrong funds , there are countless scenarios that could occur both at the swap wrapper , trade and valuation levels .
Another key factor is spotting the breaks . The European swap desks at the banks generally book their trades and close their books by 6:30pm ( CET ), and subsequently kick off the end of day reporting batch
56 // TheTRADE // Spring 2021