Under Dodd Frank, SEFs fundamentally change the relationship between dealers and their clients (for certain products)!
Under the new SEF regulations, those OTC derivatives that are deemed ‘cleared products’ – accepted for clearing by central counterparty clearing houses (CCP), and that are in standard size (not large block trades), and are made available for trading on a SEF will no longer be able to be executed by the bank on their SDP, but instead must be offered for execution on a SEF.
Clients value the liquidity delivered through their SDP relationship channels, but under Dodd Frank, in some cases clients will be prohibited from seeking a risk price directly from banks for certain products and instead must offer their positions out to SEFs for execution – which will involve greater risk management by clients.
At Caplin, we believe SDPs are ideally positioned to act as the gateway through which clients access all liquidity, and where required, route client trades through to SEFs.
So it’s encouraging that an increasing number of dealers are now embracing this view as well!
RISK.Net carried an article last week which talks about how banks are fighting back, it’s a long article (password required), but here is a small snippet, which seems to confirm yet again our view.
Dealers argue their customers won’t want to connect to more than a handful of SEFs, but also won’t want to miss out on the liquidity spread across this fragmented market. With as many as 20 SEFs now waiting in the wings, there’s a role for an aggregator. Enter single-dealer platforms. Robbed of their ability to execute clearable trades by Dodd-Frank, these platforms could now gain a new lease of life as super-SEFs, collecting prices from competing venues and once again making banks the gateway to the OTC markets. In essence, Dodd-Frank enabled SEFs to leapfrog the dealers – and dealers now hope to pull off the same trick.
“We’re discussing internally how to be the aggregator. We’re trying to find a way to make it easy to execute across cash, futures and OTC markets as a way to separate ourselves from the SEFs,” says Rhom Ram, the London-based head of Autobahn, Deutsche Bank’s single-dealer platform.
Deutsche is not alone. E-commerce specialists at five other banks all argue that dealer-run aggregators will be the way clients choose to access the market, and one claims to have a beta version of a Sef aggregator up and running already.
Under Dodd Frank, SEFs may change how dealers and clients interact, but the dealers are fighting back, and looking at innovative ways to maintain their position as the relationship channel of choice for clients.