We’ve seen it with bonds trading and we’ll see it with swaps traded on newly-minted swap execution facilities (SEFs): the buy-side is reticent to grow into the role of price maker, despite the regulatory impetus and a growing expectation from the market.
SEFs dominated discussions and conversations on Thursday at the Futures Industry Association conference in Chicago, and a number of industry leaders concluded the central limit order book (CLOB) model for SEFs – whereby both buy- and sell-side participants make and take prices anonymously - will take a long time to attract meaningful buy-side participation.
A panel on SEF readiness, featuring Supurna VedBrat, co-head of trading and market structure for BlackRock, saw unanimous agreement that asset managers will take a year or more once ‘made available to trade’ (MAT) and mandatory trading rules push swaps flow onto SEFs to really start making prices on these new platforms. Until then, buy-siders will favour the request-for-quote (RFQ) model.
One SEF operator told me the CLOB model was the best suited to buy-side swaps trading, but transitioning from bilateral OTC derivatives with its reliance on voice broking and relationships, would take a long time – long enough for CLOB-based SEFs to develop dual RFQ-CLOB functionality.
This, the argument goes, means those SEFs will not miss out on the initial (expected) burst of SEF liquidity once MAT rules likely hit in February-March, from which time greater buy-side involvement in anonymous, CLOB-based trading can develop.
A similar story has unfolded in bonds trading, as the barrage of regulatory initiatives – namely Basel III and the Volcker Rule – limit banks’ ability to hold fixed income products on their books and engage in proprietary trading activity.
This, combined with the long-anticipated push for greater electronification in bonds trading with multi-dealer, all-to-all platforms (including CLOB models) would also require the buy-side to actively make prices.
For now, through, the theoretical support and expectation within certain market participants that the buy-side will naturally evolve into this role has not translated to active buy-side price making – or even the hint it will in the near future.