A report from consultancy Celent on swap execution facilities (SEFs) has shown credit products are dominated by one venue, while liquidity in rates instruments remains tightly held by inter-dealer brokers (IDBs).
The report, the second of a two-part series released in March, has shown a concentration of interest rate swap trading on IDB SEFs, while credit default swaps activity has been constricted to dealer-to-client (D2C) platforms, chief among them Bloomberg.
“[For credit] Bloomberg is the leading SEF, followed by Tradeweb TW, the D2C offering. GFI is the only IDB to have achieved significant volumes, but has seen a decline recently,” the report read.
A volume report from Bloomberg released on Monday showed a 67% spike in trading for the overall market of CDS indices for 14 March, which it claimed was linked to tensions between Russia and the West regarding events in Ukraine.
The Celent report shows the impact of mandatory SEF trading for certain instruments under the ‘made available to trade’ or MAT rule, by which participants must trade on SEFs products put forward by venue operators, led to a reduction in trading volumes.
A steady growth in volumes since SEFs became operational on 2 October was dashed as participants were required to shift to SEF-based trading with the first MAT implementation in February. Since then, this volume has come back and continues to grow.
Another key trend the report highlights is that the expected transition to central limit order book (CLOB) trading may occur over a longer timeline than regulators initially predicted. Request-for-quote and click-to-trade models have dominated SEF trading so far as participants, including the buy-side, show reluctance to make prices in the new market structure.
“The regulatory impetus had been for central limit order books to become more common, but in practical terms this is expected to happen some time in the future. The market conditions, frequency of trading, and liquidity levels mean CLOB would be difficult to achieve,” the report, authored by Anshuman Jaswal, senior analyst for Celent, read.