As the US market approaches the third week of trading on swap execution facilities, volume figures suggest the buy-side has not yet fully embraced the new venues.
What do trading volumes so far suggest regarding buy-side SEF activity?
So far, 18 swap execution facilities (SEFs) have been registered by the Commodity Futures Trading Commission (CFTC), with a further five pending review by the commission when it returns to full capacity after the current US government shutdown. These venues have generated around US$26 billion in trading volumes for credit default swaps (CDS) and US$426 billion in interest rate swaps (IRS), according to figures compiled by the CFTC for the first week of trading.
In total, around 6,500 swaps were traded on the operational SEFs with 52% executed electronically and the rest via phone or as part of block trades.
The figures suggest on-going caution in the buy-side’s approach to SEFs, but a willingness – most likely from larger US asset managers – to move beyond simple test trades to begin incorporating SEF trading into daily operations before they are mandated to do so from November.
The ability to continue trading swaps over the phone to execute on a SEF offers the buy-side an effective way of transitioning from traditional relationship-based bilateral trading. If a buy-side trader can still pick up the phone to discuss a trade with a broker before it’s executed, there may be greater willingness to enter the SEF world, at least in the first few months.
How will the SEF landscape shift in coming months?
Predictions are somewhat vague about which SEFs will attract volume in which asset classes, but participants have shown agreement on one key point: there will be a wave of consolidation within the first year that could drastically cut the number of SEFs.
Inter-dealer brokers have emerged strong contenders to become the dominant SEFs by market share, with initial volumes – calculated from the first three days’ SEF trading – showing ICAP attracted a strong 70% in IRS trades, with a healthy performance by GFI SEF for CDS execution. Leading CDS volumes, however, was Bloomberg SEF, which was the first facility to gain CFTC approval.
For the first three days of trading, Bloomberg held 84% market share in FX derivatives with US$10.2 billion in value traded, and 71% market share in CDS, with US$16.5 billion in value traded.
Are SEF operators finding difficulty in signing up buy-side clients?
One market participant who talked to theTRADEnews.com last week suggested the first-mover advantage had manifested itself in a slightly unexpected way with Bloomberg gaining initial hegemony in FX and credit derivatives. By aggressively filing client paperwork ahead of the 2 October start date it overcame issues other operators are now laden with.
The detail-heavy documentation may be a key impediment to SEFs that are still themselves testing infrastructure and explaining operational functionality to clients. This would no doubt limit asset managers’ propensity to begin trading on these venues ahead of the November deadline.