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A perfect match?

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The acquisition by Markit of Swapswire garnered considerable attention by virtue simply of being the latest in a seemingly never-ending stream of acquisitions by the data and valuations provider. True to form, with this venture Markit puts itself at the leading edge of the capital markets’ preoccupation – improving the automation of OTC derivatives.

In fact, Markit – via the earlier acquisition of Communicator – already has a business in the OTC derivatives automation space, which the Swapswire purchase further bolsters. The fit is good. Swapswire – a network for electronic trade confirmation – is currently owned by 21 derivatives dealers. Markit specialises in taking such initiatives off the hands of their creators once they have received critical mass, vis its RED (Reference Entity Database) service.

The workflow and processing solution Markit acquired through Communicator is targeted at the buy side, while Swapswire’s revenues come from the sell side (it followed the lead of its competitor DTCC Deriv/SERV in making matching free for buy sides, and under its new ownership buy sides will continue to have access to a free service, Markit says). Swapswire’s success has been in the interest rate swaps space, though it does offer coverage of credit and equity derivatives. Markit’s workflow and processing solutions cover multiple OTC derivative types, and it clearly has a very strong footprint in the credit arena through its data, index and valuation services.

This exposure to the credit markets will surely help Swapswire build its profile in that business, and with Markit’s backing, Swapswire will be in better shape to take on DTCC Deriv/SERV on its home turf (credit), and fight it more robustly in the equity derivatives space – the new frontier for both matching services. There are some differences in approach. Swapswire positions itself in the affirmation (rather than the confirmation) space, because it enables agreement of all trade details electronically in the front office, eliminating the need for a separate confirmation stage in the middle/back office.

Markit too – along with other services like TZero – offer what they call affirmation, but they mean something different by it, essentially an early stage agreement of key details of the transaction. There is still a need for confirmation – and Swapswire has said in the past that while such a “trade tie-out” stage is useful, it is less efficient than its full upfront electronic affirmation process. That said, such discrepancies are doubtless resolvable, and it is clear that Markit is accumulating an impressive array of OTC derivatives services spanning data and process automation.

Industry scuttlebutt also has credit derivatives affirmation service TZero in Markit’s sights, which would reinforce its position further still. One entity that should be watching these events with particular interest is Omgeo, the joint venture of DTCC and Thomson Financial, which provides the de facto standard solution for matching cash equity trades. The OTC derivatives matching space is clearly the one to be in and Omgeo’ isn’t in it yet.

It also is in the curious position that one of its parents – DTCC – has stolen a march on it through Deriv/SERV – not to mention the degree of uncertainty over its future given the forthcoming absorption of its other parent, Thomson Financial, into Reuters. Received wisdom has it that the buy side of the market in particular wants fewer trade confirmation matching mechanisms covering more asset classes. If this is the case, cross-asset class coverage is a must-have, and Markit is well on the way to building that.

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