Thursday, October 03, 2013 1:19:56 PM

SEFs’ cautious start unrelated to shutdown

Institutional investors have only cautiously begun trading on swap execution facilities (SEFs), with many firms still evaluating competing offerings ahead of the mandated trading deadline, while experts agree the US government shutdown had minimal impact on initial activity.

Figures from Bloomberg SEF, and the two swaps venues operated by Tradeweb, suggest market participants will wait for a critical mass of volume before committing to specific venues.

Bloomberg SEF facilitated 110 transactions on yesterday’s first day of trading, from more than 50 firms and with participation from 11 futures commission merchants, Bloomberg said in a statement, adding that trading was conducted in all instruments on offer, which include interest rate swaps (IRS), credit default swaps (CDS), foreign exchange swaps and commodity derivatives.

Tradeweb, which offers trading in CDSs and IRSs on its TW SEF, which operates on a disclosed request-based order book and its DW SEF that operates a closed limit order book, did not disclose the total number of trades, but listed the notional outstanding of trades executed yesterday.

CDS trades executed on its TW SEF totalled US$275 million in notional outstanding, and those on its DW SEF reached US$306 million.

IRS trades executed on TW SEF hit just over US$2.1 billion in notional outstanding. IRS products executed on the DW SEF reached US$1.570 billion in notional outstanding for the most popular instrument, the USD two year vs. three month Libor swap.

Sean Owens, director of fixed income for consultancy Woodbine Associates, told yesterday’s restrained activity showed the market would wait for the Commodity Futures Trading Commission’s (CFTC) November mandated trading deadline and the expected December implementation of the Commission’s ‘make available to trade’ rule. The latter means SEF operators themselves decide which instruments can be executed on their venue, but once it is available, bilateral trading in named instruments will not be allowed.

“These dates will be key for SEF trading because the buy-side will have to have agreements in place to trade,” he said. “Until liquidity moves across to SEFs it’s hard to read too much into these initial volume figures. The composition of liquidity across these pools will be much clearer once firms are mandated to trade on these venues.”

Owens assets the government shutdown that has begun to affect the market was not reflected in yesterday’s swaps trading activity on SEFs.

“The shutdown had no impact. The volumes show the buy-side is still selecting the venues they want to commit to according to specific value proposition,” he said. “Firms are at different stages but with last week’s no-action relief from the CFTC, they have time to finalise these agreements.”

Will Rhode, director of fixed income research for consultancy TABB Group, agreed the government shutdown had a muted, if any, impact on initial SEF trading, and said the focus was on buy-side preparedness ahead of the November and December deadlines.

“Yesterday we saw was a process of test trading from the buy-side. They’re deciding which products they will they trade and where, and the focus in coming months will be on workflow processes,” he said.

A report authored by Rhode and published today stated of the 36 of firms surveyed, representing US$6 trillion in assets under management, 77% did not trade swaps on a SEF yesterday, while 14% said they had started, and 9% had conducted test trades.

Despite the shutdown’s limited impact, Rhode said some confusion had been caused by a notice from the Securities and Exchange Commission, which stated some instruments the CFTC had stated were to be traded on SEFs were in fact not eligible.

“Any uncertainty is not a good thing for the industry, especially as the key jurisdiction overseeing SEFs is not actively in business, and the other is sending mixed messages, but I don’t think it’s had a major impact on the first day of SEFs trading,” Rhode said.

Richard Henderson +1 212 217 6916