Liquidity issues hit migration to listed derivatives

A lack of liquidity providers and pricing have discouoraged buy-side participants to move from OTC to futures trading.

A lack of liquidity providers in the swaps futures space has prevented any real pick-up in volumes, according to industry experts.

With the migration of bilateral OTC derivatives into the listed futureised world, experts at this year’s FIA IDX conference in London argued there are still a number of barriers for exchanges to overcome before volumes in these products take off.

“If you have the OMS lined up and the infrastructure mechanisms sorted out, when it comes to the market place do you find the sort of liquidity that is attractive and appealing?,” said Stephen Taylor, chief risk officer, Towers Trading Group.”

“For the broad spread of demands, I would argue we don’t have enough of the diverse liquidity types and providers that are able to accommodate as a sponge of that risk transfer that exists in the OTC bilateral business.”

Exchanges such as Eurex have introduced new futurised products such as FX futures and euro-denominated swap futures, however activity has stagnated.

With stricter regulations on banks and higher capital requirements, many are reducing their role as liquidity providers in a number of markets.

In addition, buy-side participation have seen little need to trade these products due to a lack of synthetic two-way pricing.

Russ Oxley, head of rates & LDI at Old Mutual Global Investors, said the barriers to gain pricing from the order management systems (OMS) of independent software providers (ISV) has contributed to the absence of liquidity.

“For a new product you need synthetic pricing and you need real-time pricing to start trading it. However there are barriers to the OMS’s.  If you focus all of your support on those OMS’s, then you might get some take-up from the fund manager. But without those prices that you can see going up or down there is very little incentive [to use them],” Oxley said.

Taylor explained the introduction of new, diverse liquidity providers could be the saviour for converted swap futures products.

For example, Citadel Securities are increasing their role as liquidity providers in European derivatives markets. In addition, last year Virtu became the first high frequency trading firm to become a liquidity provider for the GMEX interest rate swap constant maturity future contracts.

“If we can ensure the listed markets can encourage and let thrive a broad range of liquidity provision models simultaneously, no matter what the type flow is from the end-user community there will be a good strong warehouse to transfer that risk. If they don’t, innovation in the central clearing space stops and the aims of the regulators won’t be broader than that,” Taylor added.

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