Synthetic financing transactions on the rise
29 June 2015 Edinburgh
Image: Shutterstock
A survey of 56 market participants carried out by swaps technology provider 4sight and consultancy The Field Effect has revealed that 32 percent of participants are currently booking synthetic financing transactions such as total return swaps and portfolio swaps.
A further 18 percent said they plan to do the same in the near future. Firms surveyed included a range of tier one and tier two investment banks and asset managers.
The survey was carried out as part of research for a whitepaper and webinar discussing market trends leading to an increase in synthetic financing, technology challenges and how to define a target operating model in light of increasing volumes and the complexity of synthetic trades.
The paper also discusses the emergence of holistic models incorporating physical and synthetic financing, liquidity and collateral management and balance sheet and capital deployment.
“The survey highlights the lack of effective technology provision for an increasing volume of synthetic finance swaps trading,” said Martin Seagroatt, 4sight’s director of marketing and product innovation and co-author of the paper.
“These types of swaps can be complex to process, often including multiple underlying instruments and thousands of trade events. Technology solutions that can provide efficient, automated processing of synthetic financing trades with low manual intervention and high [straight-through processing] are now a key component in running a profitable swaps business.”
According to Seagroatt, firms should seek to implement a holistic target operating model that optimises the deployment of scarce resources and maximises synergies across product types.
He concluded: “This approach looks to increase return on capital and balance sheet while reducing funding consumption and provides a deeper analysis of client profitability across all business lines.”
A further 18 percent said they plan to do the same in the near future. Firms surveyed included a range of tier one and tier two investment banks and asset managers.
The survey was carried out as part of research for a whitepaper and webinar discussing market trends leading to an increase in synthetic financing, technology challenges and how to define a target operating model in light of increasing volumes and the complexity of synthetic trades.
The paper also discusses the emergence of holistic models incorporating physical and synthetic financing, liquidity and collateral management and balance sheet and capital deployment.
“The survey highlights the lack of effective technology provision for an increasing volume of synthetic finance swaps trading,” said Martin Seagroatt, 4sight’s director of marketing and product innovation and co-author of the paper.
“These types of swaps can be complex to process, often including multiple underlying instruments and thousands of trade events. Technology solutions that can provide efficient, automated processing of synthetic financing trades with low manual intervention and high [straight-through processing] are now a key component in running a profitable swaps business.”
According to Seagroatt, firms should seek to implement a holistic target operating model that optimises the deployment of scarce resources and maximises synergies across product types.
He concluded: “This approach looks to increase return on capital and balance sheet while reducing funding consumption and provides a deeper analysis of client profitability across all business lines.”
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