Today, clients acting as Greek debt primary dealers are faced with the fact that the anticipated move by the Greek Debt Office (PDMA) to exchange sovereign paper (as part of the private sector involvement (PSI) scheme) only targets long positions. As liquidity providers, primary dealers generally have long positions in some Greek sovereign paper, while also off-setting short positions in other Greek debt.
To address the issue, Euroclear Bank created a model which enables primary dealers to close out positions, both long and short, in a highly secure and electronic manner. In what is known as the âSwapboxâ, Euroclearâs customised algorithms pair off short risk positions with long settled positions within buckets of securities of the same economic value between consenting Euroclear Bank participants. While the clientsâ net exposure to such sovereign debt remains the same, Euroclearâs tailor-made service reduces the actual volumes of short positions in such Greek government paper. Furthermore, by reducing the short positions via this swap, a number of other bilateral transactions in the local market have also been successfully completed.
The initial swap, conducted on 26 October 2011, covered an aggregate volume in Greek government bonds worth EUR 33 million comprising approximately 70 different tranches of Greek government debt.
Ivan Nicora, Director and Head of Fixed Income Product Management at Euroclear, stated: âIn general, primary dealers have to run long and short positions in order to offer liquidity to the market. In this instance, liquidity in the traditional inter-bank market became increasingly scarce. Euroclear bank, as a seasoned infrastructure service provider, has responded by setting
up a solution which minimizes respective short positions while also further contributing to the orderly management of bond positions ahead of the Greek PSI exchange.â
Sander Schol, representative of AFME/Primary Dealers, commented: âWe are delighted to work with Euroclear Bank in assisting our stakeholders unwind their long and short positions in Greek sovereign paper. Euroclear has provided an innovative solution - in
record time - to unblock liquidity.â