An absence of rules mandating use of swap
execution facilities (SEFs) has concentrated the initial weeks of SEF trading
to large asset managers and those testing connectivity, rather than a full
embrace of the venues from the outset.
there any evidence to suggest the buy-side has fully embraced SEF trading from
In short, no. While volumes have shown
steady growth since trading began on 2 October, feedback from SEF operators and
pundits pegs buy-side participation as concentrated to larger asset managers,
not evenly spread throughout the industry.
Consultancy TABB Group surveyed buy-side
firms after day one of SEF trading, finding 77% firms did not trade any swaps
on the new venues, while 14% said they had begun using SEFs for swaps trading
and the remaining 9% conducting test trades only.
But, despite this expectedly cautious
start, firms have suggested they will foray further into SEFs once the
Commodity Futures Trading Commission’s (CFTC) ‘made available to trade’ rule –
which requires market participates to stop bilateral trading of instruments
that can be traded on SEFs – kicks in in December, and mandatory trading rules
begin in November.
More than three quarters of the 36 firms
TABB surveyed, which represent a combined US$6 trillion in assets under
management, stated they aimed to begin SEF trading in between November and
initial volumes suggest certain instruments will be more popular than others on
Due to the widely tipped condensing of SEFs
expected in the first year – which experts suggest could see the current number
of operators halved – the market will be keeping a keen eye on which SEFs
attract market share in which products.
Early indications show Bloomberg’s
persistence as an early-mover has paid off in credit default swaps, for which
it attracted 84% of market share in the second week of SEF trading, according
to data compiled by Tod Skarecky,
senior vice president, Americas for OTC derivatives technology provider Clarus
For interest rate swaps (IRS), SEFs
operated by interdealer brokers continue to perform well. Tullett Prebon’s
tpSEF attracted 47% of second week IRS volumes, with ICAP SEF receiving 25% and
Tradition SEF 23%.
the US government shutdown and subsequent CFTC break affected buy-side SEF
The Commission shrunk its 680-strong
regular operating staff to just 25 during the 16-day US government shutdown,
which delayed the authorisation of five SEFs. Currently, 18 have been granted temporary
registration, but not all are open for trading as they shore up client agreements
and test their own infrastructure.
While this delay was the only tangible
consequence of the shutdown on SEFs, it’s hard to imagine the CFTC’s
pseudo-absence during this period did not cause asset managers to re-think
plans to migrate swaps trading onto SEFs. Should a problem have occurred, the
Commission simply would not have been in a position to offer guidance to the
market – and asset managers in particular – that it can when operating at full
However, when set against the mandatory
trading and ‘made available to trade’ rules, this appears a minor factor in
institutional investors’ adoption of SEF trading.
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