Optimism for SEF volumes

Volume on swap execution facilities may be depressed, but the market is optimistically looking towards the next 18 months.

Volume on swap execution facilities (SEFs) may be depressed, but the market is optimistically looking towards the next 18 months. 

This week, it was announced that James Cawley, CEO of Javelin, was stepping down from his role at the helm of the SEF. Although he will continue to serve on the company’s board, the move highlighted SEFs’ struggle to attract volume.

“Volumes across the board have been underwhelming for any of the SEFs and I think it’s going to be another 12 to 18 months minimum before we get traction. It’s still anyone’s game,” Cawley told theTRADEnews.com. 

“One has to remember that SEF rules only took effect on the back of Javelin’s made available to trade (MAT) application in February, so the market has only been open for business for 10 weeks. Yet the market isn’t really open because we still have all sorts of exemptions.”

Cawley will be replaced by Wally Sullivan, a co-founder of Pulse Trading, which was bought by State Street in 2011.

Market share

SEF rules cover both interest rates swaps (IRS) and credit derivatives, and are part of sweeping new rules to bring light to the opaque OTC derivatives market under the Dodd-Frank Act. 

The MAT rules are the de facto mandatory trading requirement for SEFs and require platforms to submit to the Commodity Futures Trading Commission (CFTC) a list of products to be traded on their SEF.

ISDA’s latest SwapInfo data in the week ending 2 May shows trading on SEFs went up by 7% when compared to the previous week, with an increase from 6,166 to 7,309 trades.

When comparing IRS trades that were cleared (9,868) with those that are trading on SEFs (7,309), SwapInfo shows about 74% of cleared trades go through SEFs.

But the numbers have been fluctuating. In the week ending 25 April, IRS trading on SEFs dropped by 16% and the week ending 18 April, it fell by 8%. 

ISDA Swaps Info uses data from swap data repository the Depository Trust and Clearing Corporation.

Packaged trades

Some SEFs, including Tradeweb, have been vocal about the lack of buy-side participation in SEFs. Packaged trades on SEFs – trades that include groups of products, for instance a number of swaps, or a swap and a bond – have been seen as a solution to get the buy-side on board. 

Tradeweb CEO, Lee Olesky, said the market would see incremental increases in SEF volume as a greater portion of the swaps market is mandated to trade with each new deadline.

“Packages comprise a significant amount of the trading that the broader asset management community uses to invest in derivatives, and we expect an uptick in trading as they start to streamline this type of trading on electronic platforms like Tradeweb,” Olesky said. 

“The transition to electronic trading of derivatives has always been an evolution. We’ve been supporting swaps trading on our platforms since 2005, and we never expected a wholesale change overnight.” 

The CFTC last week officially announced the phase in of packaged trades. From May 15, all packaged transactions in which all components are swaps that have been MAT will have to be executed on a SEF. From then on, other components will be phased in until 15 November.

Sean Owens, director of fixed Income at Woodbine Associates, said the CFTC’s phased approach was reasonable and would eventually lead to more volume being traded on SEFs.

“Behaviour is going to change but given the phase in, it hasn’t been enough to spark widespread market change yet. As more trades and more types of swaps are migrated on to SEFs, I think most people expect to see the market evolve,” he said.