Fra-Cross to use SwapsWire for electronic confirmation

Fra-Cross, the matching service developed by inter-dealer broker Icap for crossing forward rate agreements (FRAs) used to manage reset risk, is to use SwapsWire to confirm electronically matched trades.

The agreement should allow SwapsWire dealers to save time and reduce errors when managing their reset risk. Such risks spring up when, for example, a trader paying a five-year swap that then receives a five-year swap several days later at a more favourable interest rate needs to cover all the floating legs of the trades. There is a risk that interest rate volatility will cause adverse effects on the profit/loss profile of the portfolio due to rate changes between the two reset dates for the duration of the two swap deals. Using FRAs that are netted off against each other is one way to alleviate this problem.

Icap hopes the SwapsWire deal may lead to more dealers placing FRA matching runs through Fra-Cross, rather than via its main rival Switchfix, owned by Tradition.

SwapsWire – backed by a consortium of 23 top dealers – is an electronic communications network that allows dealers to transfer transaction information for over-the-counter derivatives.

At present the system only handles interest rate swaps, but SwapsWire will officially go live with FRAs and overnight index swaps on May 14.

Fra-Cross covers sterling, euros, Swiss franc, US dollar and a number of emerging markets FRAs. More than 200 traders and 80 banks are using the service, which has matched $1 trillion of FRA notionals since its inception early last year.

SwapsWire, which went live in November last year, has booked close to $2 trillion of transactions – all of them interest rate swaps.

To date, three banks have signed up to use SwapsWire’s FRA confirmation service. At least 10 more are expected to be in place by the official May 14 launch.

Dealers have typically used both Fra-Cross and Switchfix, a fax-based service, for managing their reset risk in their swaps portfolios.