Favourites named in SEF steeplechase
contenders in the nascent swap execution facility (SEF) market will offer
trading across multiple asset classes or deep liquidity in established niches,
according to capital markets consultancy GreySpark Partners.
A new report by
the firm, ‘SEFs – The business landscape’, assesses the functionality of more
than 50 platforms that are expected to compete for transaction volumes as US
OTC derivatives migrate from bilateral dealing to centrally cleared trading
platforms. Under the Dodd-Frank Act, the Securities and Exchange Commission
regulates trading in security-based instruments such as single-name credit
default swaps, while the Commodities Futures Trading Commission oversees
index-based credit defaults swaps, interest rate swaps and other
non-security-based derivatives, such as FX and commodities.
expected to thrive by GreySpark include asset class-specific platforms such as
FXall and MarketAxess as well as broader offerings from Tullet Prebon and
analysis suggested that the most successful SEFs would look to expand into the
three most liquid areas of OTC derivatives: credit default swaps, interest swaps
and FX options, potentially leaving other markets less well-served. Some SEFs
are planning to specialise either in the dealer-to-dealer (D2D) or
dealer-to-client (D2C) market while a few will attempt to serve both markets.
According to GreySpark, SEFs gravitating toward D2C will offer
request-for-quote or click-to-trade markets while D2D platforms will operate a
central limit order book. Some platforms will offer auction capabilities of
varying lengths, while others are expected to only support limit and not market
orders. Another area of differentiation is post-trade connectivity. GreySpark
said that some SEFs would connect to clearing houses based on client demand
while others would offer post-trade choice more proactively perhaps in
conjunction with a third-party connectivity provider such as Marketwire. Bradley Wood, a
partner at GreySpark, said SEFs were looking into whether clearing houses would
be able to provide real-time margin information at the pre-trade level.
providers may be due for a windfall, Richard Perrott, analyst at private German
bank Berenberg, said market reform was generally a negative for large brokers,
where OTC derivatives dealing account for almost 25% of revenues. He
said costly increases in trading transparency, penalisations for
non-standardised derivatives and greater central clearing will put revenue
pressure on banks.
charges for OTC derivatives – typically 10-times higher than listed equivalents
– will likely decline though remain significantly above exchange-traded
counterparts, reflecting OTC’s inherent lower liquidity and greater
complexity,” said Perrott. “Dealer top-line pressure will be compounded by
operating headwinds as banks invest in new trading and post-trade systems, the
cost of which may not be fully passed on to clients.”
recently put a buy notification on a global inter-dealer broker Tullett Prebon,
one of few brokers he sees with a present cheap valuation, strong balance sheet
and scope for increased capital return from the pending launch of its own SEF.
regulators are still finalising their rules for the new OTC derivatives trading
environment, with SEFs expected to start trading in January 2013.