In early spring 2011, UBS managers in New York put together an analysis on the regulatory impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on credit default swap trading. The analysis was based on draft rules from the Securities and Exchange Commission and the Commodity Futures Trading Commission. The rules weren’t finalized, so the team drew a predictive outline of the upcoming market infrastructure centered on electronic platforms and the ability for customers to make markets and trade with each other. Later that spring, Paul Hamill, now a managing director of matched principal trading in New York, gave a presentation on what would eventually become the firm’s Price Improvement Network-Fixed Income. That platform is why the editors of Derivatives Week/Derivatives Intelligence have awarded UBS the 2012 Electronic Trading Platform Of The Year Award.
PIN-FI launched Dec. 2011 and has since dominated the electronic CDS trading markets in the U.S. and Europe. It was the first electronic CDS platform and is still the only one available. As of press time, Hamill said there are 300 accounts signed up, with over 1,000 individual traders logging on each day and 40 to 50 trades made per day. Users include hedge funds, asset managers, and dealers. During the week ending June 22 alone about USD3.5 billion notional was traded. In February, when DI first reported on the platform, it had over 50 clients, and had clocked USD0.12 billion in total over about 200 trades since it launched.
PIN-FI has approximately 300 on- and off-the-run names available for users, who can see the varying levels of liquidity on names and the current bid/ask spread. The most liquid names are click-to-trade, and users can request a quote. The ability for buysiders to trade with each other or dealers, or all-to-all trading, has opened up the market so that prices are no longer the sole domain of just a handful of dealers.
“You just have a better chance of understanding where the market is and getting color and information,” Hamill said. “We’ve created a pool of liquidity that didn’t previously exist.”
In speaking to DI, several end users described the platform as “revolutionary.” Those polled said that while they did not trade on it every day, they logged in every day to check prices.
While impending regulation was able to give UBS the outline for what PIN-FI would eventually look like, the decrease in CDS volume and liquidity after the credit crisis made the instrument a less obvious choice for where UBS could have dedicated its resources. Because PIN-FI was able to show what was liquid in the market, the platform was able to attract more users looking for the best price. “Everyone’s looking for that liquidity source and everyone’s trying to work harder to get that liquidity,” Hamill said.
Hamill said the future of PIN-FI will be determined by how users want to interact with each other. As regulators clarify the rules for electronic trading, UBS may separate the execution aspect PIN-FI from the agency and swap execution facility flow parts. “The general premise of a liquidity aggregator as a conduit for customers is still the end game,” he said.
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