Swaps are evolving. But is your tech up to it?
Total return swaps, once relatively simple bilateral hedging agreements, have evolved into complex derivatives and a lynchpin of many hedge fund strategies. The technology that supports them, however, has not kept pace.
In this article, we make the case for a unified approach to swap lifecycle management and real-time risk, and why the operational gap between the instruments and the systems that run them can no longer be ignored.
The rise and rise of TRS
TRS represent just a portion of the over-the-counter equity derivatives universe, but their importance has grown significantly over the past decade, driven by rising demand for synthetic instruments that can support complex hedging strategies.
TRS allow investors to gain and/or hedge exposure that would otherwise be operationally difficult to manage, costly, or restricted, such as emerging market equities, thematic or factor-based baskets, cross-currency or cross-asset strategies, and exposures tailored to specific mandates.
According to the Bank for International Settlements, equity forwards and swaps increased their share of the overall equity derivatives market from 25% at the end of 2008 to 50% at the end of 2022. The International Swaps and Derivatives Association attributes this growth to “increased globalization, market access and diverse investment strategies that leverage the versatile nature of the products.”
A shifting landscape for swaps
At the same time, the regulatory and technological environments in which these instruments trade are transforming fast.
Regulators are revisiting the post-financial crisis OTC derivatives frameworks, looking to simplify, harmonize, and modernize reporting requirements. In the US, the Commodity Futures and Trading Commission recently passed a rule that streamlines swap dealer documentation requirements and removes duplicative processes.
In Europe, regulators are undertaking comparable reforms aimed at improving the quality of reported data.
The result is a more streamlined regulatory environment, but one that is less forgiving of operational gaps. Once these regimes are simplified, regulators will expect financial institutions to represent, value, and explain their swaps activity at a granular level — across risk factors, cashflows, and lifecycle events — in a way that legacy systems struggle to deliver.
In practice, these are complex derivatives to trade and manage. During their lifecycle, TRS trades will touch multiple prime brokerage systems and trading desks through the organization, involve custom financing terms, and depend on multiple back-office processes, much of which remain manual. This combination of bespoke economics and distributed workflows makes TRS harder to standardize, and operational systems become the bottleneck.
As TRS volumes increase and market expectations rise, the operational risk of stitching together lifecycle systems, risk engines, and spreadsheet overlays becomes untenable.
Why Legacy Systems Can No Longer Keep Up
In practice, these are complex derivatives to trade and manage. During their lifecycle, TRS trades will touch multiple prime brokerage systems and trading desks through the organization, involve custom financing terms, and depend on multiple back-office processes, much of which remain manual. This combination of bespoke economics and distributed workflows makes TRS harder to standardize, and operational systems become the bottleneck.
As TRS volumes increase and market expectations rise, the operational risk of stitching together lifecycle systems, risk engines, and spreadsheet overlays becomes untenable.
A unified approach for today’s TRS desks
The pressures on TRS desks today are a result of the cumulative effects of fragmented infrastructure. Many desks are a patchwork, but managing the full lifecycle of a swap requires integrated systems that can capture and process events as they occur. Risk also cannot be managed in isolation.
Desks need a consolidated, real-time view of both swap and hedge performance. Separating these views across systems and running end-of-day reconciliations creates delays and introduces errors.
TS Imagine has launched a new integrated module for managing the full economics and risk of a swaps desk. The module brings together SwapSmart, TS Imagine’s swap lifecycle management engine, RiskSmart+, its real-time risk and P&L platform, and TradeSmart, its multi-asset order and execution management system — giving synthetic prime brokerage desks and asset managers the tools to run swaps and hedges as a single, unified book rather than siloed systems stitched together after the fact.
“The days of the patchwork trading desk are over. Our users do not have time to navigate fragmented technology systems while also managing performance swaps and monitoring P&L and risk in real-time. They need one stack to cover price discovery and execution through every swaps lifecycle event.”
-Rob Flatley, Founder & CEO, TS Imagine.
One Unified Module
Product Capability
SwapSmart, RiskSmart+ and TradeSmart — One Unified Module
- •Significantly reduced operational overhead through the elimination of manual processes.
- •Real-time intraday P&L visibility across risk, hedge discrepancies, and more.
- •Native P&L attribution for streamlined Volcker Rule reporting, removing the need for manual overlays.
- •Reduced reconciliation breaks and investigation time.
- •Support for a wide range of instruments, including single name and index TRS, basket and portfolio swaps, CFDs, and multi-asset underlyings.
- •Architecture validated against the requirements of large institutional synthetic prime brokerage clients.
The patchwork desk is a structural liability.
If your desk runs on spreadsheets and stitched-together systems, you’re paying for it in hidden risk and costs.
See the unified module in action
SwapSmart, RiskSmart+ and TradeSmart — built for the complexity of today’s TRS desks.
