The move to add packaged transactions on swap execution facilities (SEFs) will add complexity for the buy-side as it requires a greater number of trades to execute on the platforms.
The Commodity Futures Trading Commission (CFTC) has indicted it will phase-in the trading of packaged transactions on SEFs from mid-May, according to comments from Republican commissioner Scott O’Malia.
These trades bring together a number of instruments under one umbrella trade – for instance a swap and a bond, or a number of different swaps – and reflect the bespoke nature of OTC derivatives trading.
“The inclusion of packaged transactions means even more complexity for the buy-side in the SEF trading environment,” David Weiss, senior analyst with consultancy Aite Group, told theTRADEnews.com.
Weiss said the addition of packaged transactions trading on SEFs would further alter asset managers’ relationships with swaps dealers, as the former take greater control of SEF-based trading.
“It will put further strain on the buy-side to trade MAT products on the SEF and rely less on the sell-side to meet the demands of transitioning to SEF trading,” he said.
The exclusion of packaged transactions has allowed firms in some cases to circumvent mandatory trading requirements under the ‘made available to trade’, or MAT, rule, which requires SEFs to list the swaps they will offer on their platforms, requiring participants to trade these on any active SEF.
This could be achieved by packaging a swap listed for MAT trading with another instrument to continue to trade the products bilaterally with a dealer.
“This can be seen as MAT phase two,” Weiss added. “It will put more pressure on the buy-side to transition to SEF trading.”
In a report published this week by Aite, the consultancy predicted that a cycle of fragmentation and consolidation would occur within central counterparties (CCPs) as post-crisis reforms to push OTC derivatives trades through clearing houses are implemented globally.
The report, by senior analyst Virginie O’Shea and research associate Will Woodward, predicted the number of CCPs globally would grow with central clearing of OTC derivatives coming online in regions such as Australia, Latin America and Africa.