TrueEX Takes Early Lead in Building Rate Swaps Exchange

Sunil hirani hopes his follow-up act on Wall Street is better received than Oliver Stone's.

A pioneer in the derivatives industry, Hirani in 1999 co-founded Creditex, an influential electronic platform for trading credit-default swaps. Now he's back leading a financial technology company called trueEX, which aims to spur an e-trading evolution in another high-volume derivatives category: interest-rate swaps.

"That is an area that has not seen any automation or little innovation in the last few decades," says Hirani. "It's just absolutely fertile territory to innovate in."

Unlike the active electronic trading of other hedge instruments, interest-rate swaps conducted by institutions (for themselves or clients) have traditionally been privately negotiated over the phone between buyer and seller-a practice being put to rest under Dodd-Frank regulations requiring exchange-based trading and third-party clearing of standardized over-the-counter derivatives like swaps.

New York-based trueEX is the first swaps exchange to be approved by the Commodity Futures Trading Commission, which alongside the Securities and Exchange Commission is still scoping out rules for derivatives nearly three years into the Dodd-Frank era.

TrueEX will handle so-called plain vanilla interest rate swaps, which at an estimated $300 trillion annually comprise the largest global derivatives market. These types of swaps usually involve standard trades shifting around fixed-rate investments for more volatile floating-rate securities as part of institutional and corporate risk-management strategy.

TrueEX already has contracted with CME Group and LCH Clearnet to conduct the clearing for clients, providing options as to which clearinghouse to designate for a trade. The company also plans on offering specialized off-the-run order types not listed by dealers, and eventually may get into futures swaps as well.

Hirani says the platform fulfills the requirements for reporting trade prices and volume to repositories like the Depository Trust & Clearing Corp., which has a mandate to compile swaps data in the new regulatory environment. (The swaps data reporting issue is the subject of a fierce legal battle brewing against the CFTC. The agency is considering CME's request to maintain-and monetize-its own data for clearing and reporting, while the DTCC argues that the swaps data should be forwarded along to its warehouse to carry out the transparency designs of Dodd-Frank. Regardless of who the CFTC sides with, it is expected that the losing party will challenge the agency's ruling in court.)

TrueEX plans to take its platform out of the piloting stage this spring to begin offering the system to banks and their buy-side clients.

Hirani would not identify which clients were in negotiations, but Swiss-based UBS reportedly has been in talks with trueEX to deliver its client volume to the exchange.

Besides the fact that it was the first (and thus far only) rate-swap platform approved by the CFTC, trueEX is gaining attention because of Hirani's track record at Creditex, which built a strong following in the pre-crisis era with buy-side firms trading credit-default swaps. According to Deloitte, Creditex grew revenue nearly 800 percent between 2001 and 2005. Hirani sold the firm to IntercontinentalExchange (ICE) in 2008 for $513 million.

That money earned him not just a windfall but also the attention of Stone, when the director was seeking consultants for his much-anticipated "Wall Street" follow-up, "Wall Street: Money Never Sleeps," in 2010. A cameo appearance by Hirani couldn't salvage the film from lukewarm reviews.

Could Hirani be more successful with his own sequel to Creditex?

David Weiss, a senior analyst at Aite Group, says one of the market issues that trueEX may have to face up to is the potential reluctance by clients to vest its partner, CME Group, with a prominent clearing role in the regulated swaps universe when it already is the largest futures exchange in the world.