UBS AG is in advanced talks to send interest-rate swap orders by its customers to swaps exchange trueEX Group LLC as the bank adjusts to rules under the Dodd-Frank Act, according to two people familiar with the matter.
The firms are discussing a partnership as Zurich-based UBS brings its electronic swap-trading platform, the Price Improvement Network, into compliance with the regulation, said the people, who asked not to be identified because the talks are private. Agreements to receive guaranteed trading volume from a major bank may boost trueEX’s chances against rivals in the competitive market for regulated swaps trading.
The 2010 legislation, the most sweeping overhaul of U.S. financial regulation since the 1930s, will require swaps dealers and major market participants to execute trades on regulated systems known as swap-execution facilities or designated exchanges such as trueEX, co-founded by Sunil Hirani. The U.S. Commodity Futures Trading Commission hasn’t completed the swaps trading rules or defined what a SEF is.
Megan Stinson, a spokeswoman for the bank, confirmed the talks. Jill Totenberg, a spokeswoman for trueEX, didn’t immediately respond to a request for comment.
Switzerland’s biggest bank is seeking an advantage by setting up its customer trading to be compliant with rules still being completed by the CFTC, the people said. UBS must seek partners because of a rule proposed in October 2010 that prevents one firm from owning more than 20 percent of a regulated exchange or trading system. The firms may announce a deal within the next two months, one of the people said.
Bloomberg LP, the parent company of Bloomberg News, has said it plans to register as a swap-execution facility and could compete with trueEX for transaction business. Other firms that have said they plan to register as SEFs include Tradeweb LLC, ICAP Plc, GFI Group Inc. and Creditex, a unit of Intercontinental Exchange Inc.
UBS has been directing swaps trades, which historically were privately negotiated over the telephone, onto its automated platform. PIN lets customers directly post prices with a so-called order-book model where bids and offers are shown before the trade. UBS is seeking to pool clients and orders, then funnel them through the regulated trading systems.
Dodd-Frank allows swaps trades backed by clearinghouses to be completed either on regulated trading systems or an exchange.
TrueEX is the first swaps exchange approved as a designated contract market by the CFTC. Hirani, an architect of the credit-default swap market, co-founded Creditex Inc. before selling it to ICE in 2008 for $513 million.