An absence of rules mandating use of swap execution facilities (SEFs) has concentrated the initial weeks of SEF trading to large asset managers and those testing connectivity, rather than a full embrace of the venues from the outset.
Is there any evidence to suggest the buy-side has fully embraced SEF trading from the outset?
In short, no. While volumes have shown steady growth since trading began on 2 October, feedback from SEF operators and pundits pegs buy-side participation as concentrated to larger asset managers, not evenly spread throughout the industry.
Consultancy TABB Group surveyed buy-side firms after day one of SEF trading, finding 77% firms did not trade any swaps on the new venues, while 14% said they had begun using SEFs for swaps trading and the remaining 9% conducting test trades only.
But, despite this expectedly cautious start, firms have suggested they will foray further into SEFs once the Commodity Futures Trading Commission’s (CFTC) ‘made available to trade’ rule – which requires market participates to stop bilateral trading of instruments that can be traded on SEFs – kicks in in December, and mandatory trading rules begin in November.
More than three quarters of the 36 firms TABB surveyed, which represent a combined US$6 trillion in assets under management, stated they aimed to begin SEF trading in between November and February.
Do initial volumes suggest certain instruments will be more popular than others on SEFs?
Due to the widely tipped condensing of SEFs expected in the first year – which experts suggest could see the current number of operators halved – the market will be keeping a keen eye on which SEFs attract market share in which products.
Early indications show Bloomberg’s persistence as an early-mover has paid off in credit default swaps, for which it attracted 84% of market share in the second week of SEF trading, according to data compiled by Tod Skarecky, senior vice president, Americas for OTC derivatives technology provider Clarus Financial Technology.
For interest rate swaps (IRS), SEFs operated by interdealer brokers continue to perform well. Tullett Prebon’s tpSEF attracted 47% of second week IRS volumes, with ICAP SEF receiving 25% and Tradition SEF 23%.
Has the US government shutdown and subsequent CFTC break affected buy-side SEF participation?
The Commission shrunk its 680-strong regular operating staff to just 25 during the 16-day US government shutdown, which delayed the authorisation of five SEFs. Currently, 18 have been granted temporary registration, but not all are open for trading as they shore up client agreements and test their own infrastructure.
While this delay was the only tangible consequence of the shutdown on SEFs, it’s hard to imagine the CFTC’s pseudo-absence during this period did not cause asset managers to re-think plans to migrate swaps trading onto SEFs. Should a problem have occurred, the Commission simply would not have been in a position to offer guidance to the market – and asset managers in particular – that it can when operating at full capacity.
However, when set against the mandatory trading and ‘made available to trade’ rules, this appears a minor factor in institutional investors’ adoption of SEF trading.
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