BarCap extends Barx to variance swaps

Barclays Capital has extended Barx, its electronic single-dealer trading platform, to cover variance swaps. The service will enable Barclays’ customers to trade variance swaps on a variety of equity indexes through their Bloomberg terminals.

The service will initially allow investors to trade variance swaps on the Eurostoxx 50, Dax, S&P 500 and FTSE indexes, with the Nasdaq, South Korea’s Kospi 200 index and the Nikkei 225 stock index to be added over the first quarter.

The introduction of variance swaps to the Barx platform will create greater price transparency and facilitate quick execution of trades, while the straight-through processing capability will enable Barclays to process a greater volume of trades, says Dixit Joshi, managing director and head of equity derivatives at Barclays Capital in London.

"What this does is makes pricing more transparent, while taking away the hassle factor when you need to execute. So, as opposed to an over-the-counter bilateral trade, where client speaks to sales person, sales person speaks to trader and vice versa, we’re stripping out that entire loop and we’re going straight for click-and-trade functionality,” he says.

The service was tested by a handful of Barclays Capital’s customers in December, with several “normal market-sized transactions” on the Eurostoxx traded on the system, says Joshi. However, the service will now be available to all BarCap’s clients. “Variance swaps have gone from being an innovative, esoteric instrument a few years ago to being a standard tool in the kit of anyone trying to hedge volatility or take a position in vol, so right now it is a mainstream instrument,” says Joshi.

Barclays launched Barx in July 2003, starting with euro-denominated interest rate swaps. It has since expanded to cover dollar, sterling and yen interest rate swaps, US Treasuries, Treasury inflation-protected securities and euro-denominated single-same credit default swaps, among others. Around £3 trillion in volumes were processed via Barx across all asset classes in 2004.

"We think this is a natural evolution of the market,” says Joshi. “A few years ago, people said that there was no need to trade interest rate swaps electronically, and that the market was fine over the phone. But when you find an efficient way, people gravitate towards that. We think variance swaps will go the same way.”