Packaged trades are very much in news these days. One of our readers wanted to know what these trades are and why the focus on them now. Hence this write up
Packaged trades are products that provide flexibility to trade transactions. They are also known as multi-leg or spread trades.
Some examples are
1.Curve Trades – These are two swap trades of different tenors
2.Butterfly Trades – These are three swap trades of different tenors
3.Swap Baskets – These are large number of swaps which may represent
a combination of unwinds and new positions
All the above – 1,2 and 3 are commonly known as Swap Versus Swap
4.Government bonds versus swaps of similar tenor
5.Invoice spreads which are swaps versus treasury futures
All the above – 4 and 5 are commonly known as swap spreads
6.MBS Basis – These are Agency MBS versus swaps
7.Corporates hedging issued debt
8.Investors hedging corporate bond investments
All the above – 7 and 8 known as corporate bond hedging
9.Delta neutral swaptions – These are uncleared OTC swaptions versus matched dated swaps
10.Municipal bond hedging – These are duration risk hedging of muni positions with OTC swaps
Market participants in the USA want regulators to delay rules that require packaged trades to be executed on Swap Execution Facilities, citing operational and systemic risks.
According to them, Commodity Futures Trading Commission – CFTC – should slow down in its efforts to bring packaged trades consisting of multiple legs onto swap execution facilities.
They also add, forcing these trades on to the new trading platforms would have a very substantial negative impact on the buy side firms’ ability to access liquidity and has the potential to create systemic risk.
It may be recalled, on 15th February 2014 CFTC provided temporary relief from the Swap Execution Facility mandate for transactions that include multiple components – such as swap spreads, invoice spreads and curve trades – and promised to find a thoughtful solution.
With CFTC no action so far means this temporary relief is set to expire on May 15 and naturally the market participants are in the dark about the regulator’s next steps.
The industry has no idea which segments of packaged trades will be traded on Swap Execution Facilities. With just ten days left, every one is hoping against hopes that the right trades are mandated and the wrong ones are excluded. Still the market will require sufficient time to prepare for procedures, controls, technology support, business training – everything virtually.
Now one may agree why this focus on packaged trades now.