Despite months of lead time, many US asset managers will next week execute their first swap execution facility (SEF) trades when mandatory trading begins, although the key test for buy-side firms will be the transition to central limit order book (CLOB) trading, a New York conference heard yesterday.
Although the first SEFs became operational in October, many asset managers have yet to execute trades on the platforms, one leading SEF operator told the FIX Trading Community conference. He said up to 600 clients – including asset managers – were ready ahead of next week’s ‘made available to trade’ start date.
Speaking on a panel, George Harrington, global head of fixed income, currency and commodity trading for Bloomberg, which operates a SEF for rates, credit and FX, said only a small portion of buy-side firms had engaged in test trades on its SEF, which was the first such platform certified by the lead US derivatives regulator.
Harrington said around 100 firms were already trading in volume on the SEF. “We have an additional 500-600 firms that are signed and ready to go, who as of Tuesday will be doing their first electronic SEF trades. It will be a dramatic few weeks,” he said.
But Harrington said the large amount of firms yet to trade would not represent a large amount of notional volume and he did not expect this segment of the market to cause a spike of activity on Bloomberg’s SEF.
The official date for MAT trading is Saturday 15 February, although this will likely take effect for Asia-based firms falling under the ‘US persons’ definition on Monday 17 February and for US firms on Tuesday 18 February, after a federal holiday.
European firms will be exempt from mandatory SEF trading until European equivalent rules for trading swaps is established within the MiFID II framework under a deal finalised on Wednesday between the European Commission and Commodity Futures Trading Commission (CFTC).
At present, 21 SEFs have gained temporary approval from the CFTC, although not all are actively executing trades. SEFs are required to offer both the request-for-quote trading model and the CLOB model, the latter of which is expected to become the dominant model in the future for liquid OTC derivatives.
Fellow panellist Alexander Reyfman, director at Barclays, where he is responsible for developing market making systems in credit default swaps and corporate bonds, said the buy-side transition to price maker in an all-to-all market model would be the next major challenge for SEF trading.
“The biggest question is whether the buy-side will start actively participating on CLOBs and if that were to occur would the distinction between buy-side and sell-side disappear in some way,” Reyfman said.
Panellists also noted a lack of regulatory guidance on packaged transactions, which include swaps packaged together with non-OTC derivatives like futures and bonds, had created confusion for participants.
Despite no-action relief from the CFTC this week, panellists agreed there was a lack of clarity around key issues such as whether all products within a packaged transaction would have to be guaranteed for clearing under mandatory pre-trade credit checks mandated for SEF transactions.
Next week’s deadline, the result of a MAT submission from rates-focused Javelin SEF, will be followed by four more already approved by the CFTC, including one that will mandate credit products, that will come into force on 26 February. In December, Bloomberg SEF filed a MAT application that is expected to take affect in March.
Under the SEF framework, a MAT product is not limited to trading on the SEF that initially included it in its MAT submission, but may be traded on any SEF offering execution for that instrument. This means products under Javelin’s MAT plan, which include US dollar and euro swaps and swap spreads with tenors between two and 30 years, can trade on any SEF offering that product.
SEFs are expected to offer a range of products and services for the buy-side to ease the transition to mandatory SEF trading. This week, Bloomberg launched sponsored access functionality on its SEF, giving asset managers the ability to execute through a clearing member that also acts as futures commission merchant. This lets clearing members provide clients with execution services to directly access the SEF.
The shift towards mandatory trading on SEFs may result in growth of swap futures products, which mimic standard OTC derivatives but are subject to lower margin requirements. Eris Exchange, one US venue offering trading in swap futures, this week facilitated the execution of its Eris Standard Swap Future by UBS on behalf of a buy-side client.