Third in a series of interviews with technology leaders whose views are relevant to AMG members.

Interview with Chip Carver, CEO, SwapsWire

Asset Management Group: What are some major focus areas for SwapsWire in 2007?

Chip Carver: SwapsWire continues to maintain a prominent position in the interest rate market and that will continue to be an important part of our future success. In addition, when people look at the functionality of SwapsWire, they find that it is directed towards the buy side and focused on solving many of the issues specific to buy side firms. A major focus for us in 2007 will be to improve functionality for the buy side.

We have also recently started to make a push on a horizontal basis into both CDS and equities. In the equities, we are seeing momentum from regulators via the banks about the need to address processing. Our equity business went live in 2005 and we have already seen an increase in the volumes so far in 2007. We are presently operating equity products in both Europe and Asia and will be moving into the U.S. sometime early in 2007.

Asset Management Group: What about CDS?

Chip Carver: On the CDS side, despite some lower volumes, our product remains strong and we continue to develop new ideas including a real possibility of dropping those trades into the DTCC Warehouse sometime by the end of the first quarter.

Asset Management Group: What is your vision of the derivatives markets - has automation finally arrived? How do these markets evolve from here?

Chip Carver: There is certainly automation in both the CDS and IRS markets. The IRS market does not receive as much attention in part because some of the processes that have developed in the CDS market are not seen as necessary in the IRS market. On the IRS side, market participants are using SwapsWire and other products because it is prudent to have an electronic solution.

In my opinion, straight through processing has arrived for CDS and IRS and is likely to develop in the equity market by the middle of 2007. The next big issue is what happens regarding electronic execution.

Asset Management Group: Speaking of which, what is ahead for electronic execution?

Chip Carver: It always takes time for people to be comfortable with change. In this case, that change is execution taking place on an electronic platform. But with the abundance of offerings and the variety of ways to execute electronically, people will quickly become more comfortable with it. In addition, the providers of liquidity are also getting increasingly comfortable with supplying quotes to those types of systems.

Most market participants realize that the traditional voice executed trades, especially in derivatives, are not going away. The reason many of the traditional derivatives markets exist and have been successful is the result of the bespoke nature of these markets. The ability to customize is extremely important.

However, the instruments in the OTC market are being used more to take positions, where the bespoke nature is not as necessary. Market participants just need exposure to a particular type of interest rate, currency, equity, etc. and they are not necessarily locked into specific dates or hedging a particular instrument. As a result, in my view, you are getting flexibility which allows people to be more interested in electronic execution.

Asset Management Group: How is SwapsWire making the connectivity with custodians and prime brokers?

Chip Carver: Prime brokers and custodians do need to be involved on the STP side. For example, prime brokers are going to be involved in over-the-counter derivatives whether it's done electronically or by voice. Our prime broker function allows the executing broker and the underlying user of the product to negotiate the transaction whether it's done by voice or through an electronic platform. Once the trade has been executed the information is then sent to SwapsWire alerting the prime broker to the transaction and automatically creating two new trades between the prime broker and executing broker and prime broker and client. This is all done fairly seamlessly for the prime broker.

We've created a process that simplifies the documentation of the transaction for the prime broker and allows them to use the same links and hooks for other SwapsWire products. In other words, any trade that their trading desk might do directly, although it's a "Chinese Wall," they can use the interconnectivity to do it.

As for the custodians, the system is set up so that any SwapsWire clients can choose to expose all trades to a particular administrator, custodian or even another group within their bank. It's simple for us to do with our permissionings once the client makes the request. In addition, it's not essential that the process get started by electronic execution.

Asset Management Group: Do you foresee trade affirmation for all asset classes being automated between dealers and asset managers?

Chip Carver: At some point in time that is likely to happen. The banks and the buy side continue working together with regulators to decide what particular product gets the next letter, which is similar to the way we approach the business.

For example, the derivatives market will always have some tweaking and changing of trades. And in an effort to have a rigorous STP event, those transactions can utilize the confirmation system without a big translation effort. However, standardization is critical. In electronic trading, it's not possible for the process to be loose as it can be with a paper confirmation. That's not to say paper confirmation is bad, but it's not possible to replicate that electronically. In order to maintain efficiency and standardization, everything associated with that electronic transaction has to be replicated precisely every time.

Asset Management Group: Given the balance between the flexibility of these instruments and the need to come up with standardization for processing, how do you keep in touch with the marketplace, with the industry? What's the secret to your success in doing that?

Chip Carver: First, one of the keys is that many of the professionals at SwapsWire have been involved in this industry for many years and have extensive knowledge about these markets. In addition, many of them previously worked where are customers are today which is also important.

The second part is that we've been growing. From 2002 to 2005, the size of our staff grew from roughly 40 employees to more than 60 this year and we're hoping to reach 90 people by the end of 2007. We are expanding our capabilities by adding critical staff to focus on these new areas.