A triple-A debt origination mechanism made possible by a unique swap trading platform

A single-purpose platform allowing emerging market (EM) banks to participate in the debt issuance of triple-A multilateral development banks (MDBs)

The
Problem

A structural exclusion, not a market failure

Triple-A MDBs raise substantial volumes of debt annually. Being sophisticated issuers, they diversify their investor bases and product offerings. Due to risk management policies, virtually all bonds and notes issued are swapped to appropriate floating-rate benchmarks. As a result, funding cost is evaluated on an all-in after-swap basis, and swap markets constrain the feasible issuance space.

MDBs’ approved swap counterparty lists are relatively short. In general, counterparty eligibility is dependent on credit ratings. As a consequence, most EM banks are not generally approved as swap counterparties.

While they may work with MDBs, as has been the case with local currency debt issues, EM banks are excluded from broad participation in MDB debt issuance and swap trading. The result is limited execution capacity, weakened competition in debt and derivative markets, and a missed opportunity for domestic capital market development.

A
Market-Based
Solution

A single-purpose swap trading platform with zero net market risk and minimal counterparty risk

Spartacus Derivative Products, LP (Spartacus) operates entirely within existing market infrastructure, rating-agency frameworks, and MDB risk management processes.

Designed to carry no net market risk and minimal counterparty risk, Spartacus allows EM banks to participate in the bond issuance and swap trading activities of MDBs. By doing so, Spartacus aligns stakeholder interests and generates development impact.

Every swap between an MDB and Spartacus is simultaneously mirrored by a swap between Spartacus and a participating bank. The latter swap is immediately novated through a qualifying central counterparty (QCCP). As a consequence, Spartacus has zero net market risk exposure, and it has only triple-A MDB and QCCP counterparty exposure. Triple-A MDBs with which Spartacus transacts are not subject to mandated clearing and have 0% risk weights.

Shareholder interests are aligned because Spartacus’s operations are aimed at reducing MDBs’ funding costs. MDBs’ funding costs are directly related to MDBs’ lending rates to borrowing member countries (BMCs). Thus, lower MDB lending rates to BMCs improve BMCs’ debt sustainability and financial stability, both of which are of primary concern to MDBs’ boards. MDBs’ boards are comprised of representatives of sovereign shareholders. BMCs are MDB shareholders; in fact, they are the majority shareholders at regional MDBs. Healthy domestic capital markets are vital to economic growth, so it is vital for EM banks to participate fully in MDBs’ treasury operations.

Spartacus mechanics diagram. Top row: MDBs issue a 5% USD 1 BN bond through a participating Bank to Investors, with USD 1 BN flowing back. Left column: between MDBs and the Swap House, MDBs pay 5% on USD 1 BN and receive SOFR + X% on USD 1 BN. Middle row: the Swap House pays SOFR + X% USD 1 BN to a participating Bank and receives 5% on USD 1 BN. Bottom: Swap House and Bank novate the trade through the QCCP. No notional amounts are exchanged between MDB/DFI and the Swap House, nor between the Swap House and the Bank.

Structure
&
Governance

A bankruptcy-remote, independently-governed, and single-purpose platform

In addition to best-in-class processes, Spartacus offers a narrow focus and a legal separateness.

Spartacus is a Delaware limited partnership owned by a general partner (GP) and two limited partners (LPs). The Limited Partnership Agreement (LPA) defines the relationship among the GP and the LPs. The LPA establishes a board with a majority of independent directors and defines the fiduciary duties of the GP and of the board.

The legal structure is analogous to that of a special purpose vehicle (SPV) used in a securitization process. The securitization SPV structure achieves asset segregation, bankruptcy remoteness, and operational insulation.

Alignment
&
Impact

Aligned Stakeholder Interests and High Development Impact

By delivering lower funding costs to MDBs, reducing MDB lending rates to BMCs, and facilitating general MDB engagement for EM banks, Spartacus generates high development impact.

MDBs

One swap counterparty that engages with EM banks and arranges notes priced better than global bonds. Lower funding costs. Diversified investor bases and product offerings. Transfer of capacity to domestic capital markets.

EM Banks

Access to MDB treasury operations — bond issuance and swap trading — and MDB debt investors. Improved processes and profitability.

BMCs

Lower borrowing rates from MDBs. Raised profiles of currencies and markets. Domestic capital market development. Improved debt sustainability and financial stability.

About
Solvaris

Spartacus is the first, not the only

Spartacus is the cornerstone platform of a Development Finance ecosystem to be created by Solvaris.

Solvaris designs and operates institutional platforms that resolve significant Development Finance challenges by harnessing markets and skills. Solvaris provides scalable solutions without any reliance on official development assistance (ODA).

Spartacus is scalable because it can work with QCCPs to expand the range of cleared products (for example, new currencies) and combine multiple cleared products into single cleared products (for example, non-deliverable interest-rate swaps and non-deliverable forwards into non-deliverable cross-currency swaps). Similarly, Spartacus can employ technology to automate the debt issuance processes of MDBs.

Subsequent platforms will continue to offer solutions crafted for a world of declining ODA. Solutions will focus on EM debt sustainability, capital market development, blended finance impact, and other domains in which commercial discipline and development impact overlap to produce strong economic growth.

Leadership

Founder

Nick K. Kolev

nick.kolev@spartacusderivatives.com nick.kolev@solvarisventures.com