Single Dealer Platforms fight back against SEFs


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.

ISDA release paper on the Economics of Central Clearing (by the Streetwise Professor)


ISDA has just released a discussion paper called “The Economics of Central Clearing: Theory and Practice“, written by the Streetwise Professor

I have a lot of time for the prof, so I am sure the paper will be worth the read!

The paper points out both the benefits and potential issues related to central counterparty clearing facilities (CCPs). Several of its more important conclusions include:

  • CCPs can successfully reduce and reallocate counterparty risk through rigorous preparation for, and management of, member defaults;
  • CCPs can also create systemic risk, and it is imperative they have strong and conservative risk management and sufficient financial resources to withstand stressed markets. They also require close supervision by regulators;
  • The margin policies of CCPs can pose risks to the efficient functioning of the financial system. Mandatory clearing of OTC derivatives will lead to a large amount of liquidity being tied up as margin at CCPs. Increases in margin requirements by CCPs during a crisis could be destabilizing;
  • CCPs should generally align control, governance and membership requirements with the interests of participants that absorb their risks and share their losses.

CCP Clearing for OTC Derivatives – white paper from Cognizant


An informative white paper from Cognizant on the impact of CCP on OTC Derivatives markets. Great workflows for the trade routing to CCP shown on page 6.

What can OTC Derivatives learn from Silvers crash last week?


A key objective of Dodd Frank has been to put in place regulations for the OTC derivatives markets, that will reduce systemic risk in the financial system. The mandatory use of Central Counterparty Clearing (CCP) for cleared products is key to that strategy.

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FX Swaps & Fwds EXEMPT from Dodd Frank – OFFICIAL!


At last!

US Treasury Secretary has finally determined that FX Swaps and FX Forwards should be exempt from the definition of Swaps under Dodd Frank. (full details here or here)

SEF Trading & Central Clearing (Exempt): FX Swaps and FX Fwds will NOT be required to trade on SEFs, or be centrally cleared.

Trade Reporting (Required): FX Swaps and FX Fwds will remain subject to reporting requirements according to the CFTC (see earlier post here)

Other FX derivatives subject to Clearing & Exchange Requirements: FX Options, Currency Swaps and Non Deliverable Forwards (NDFs) are not exempt from Dodd Frank, as they do not satisfy the statutory definition of an FX Swap of FX Forward.

As usual, the Streetwise Professor has a good analysis of the determination, worth reading here

Other coverage includes:

WSJ here

FT here

EU has opened two antitrust probes into transparancy in CDS market


The EU has opened two antitrust probes into transparency in CDS market.

First Probe: CDS information market: The first investigation focuses on the financial information necessary for trading CDS. The Commission has indications that the 16 banks that act as dealers in the CDS market give most of the pricing, indices and other essential daily data only to Markit, the leading financial information company in the market concerned. This could be the consequence of collusion between them or an abuse of a possible collective dominance and may have the effect of foreclosing the access to the valuable raw data by other information service providers. If proven, such behaviour would be in violation of EU antitrust rules (Articles 101 and 102 of the Treaty on the Functioning of the European Union – TFEU). The 16 CDS bank dealers are: JP Morgan, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Crédit Suisse First Boston, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo Bank/Wachovia, Crédit Agricole and Société Générale.

The probe will also examine the behaviour of Markit, a UK-based company created originally to enhance transparency in the CDS market. The Commission is now concerned certain clauses in Markit’s licence and distribution agreements could be abusive and impede the development of competition in the market for the provision of CDS information.

Second Probe: CDS clearing: In the second case, the Commission is investigating a number of agreements between nine of the above 16 CDS dealers (Bank of America Corporation, Barclays Bank plc, Citigroup Inc, Crédit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group, Inc., JP Morgan Chase & Co, Morgan Stanley and UBS AG) and ICE Clear Europe. These agreements were concluded at the time of the sale, by the dealers, of a company called The Clearing Corporation to ICE. They contain a number of clauses (preferential fees and profit sharing arrangements) which might create an incentive for the banks to use only ICE as a clearing house. The effects of these agreements could be that other clearing houses have difficulties successfully entering the market and that other CDS players have no real choice where to clear their transactions. If proven, the practice would violate Art 101.

The Commission will also investigate whether the fee structures used by ICE give an unfair advantage to the nine banks, by discriminating against other CDS dealers. This could potentially constitute an abuse of a dominant position by ICE in breach of Article 102.

Full details here:

The Streetwise Professor has added his thoughts to the EU probe here

Last week’s (AFME) European Market Liquidity Conference


Last week I attended the excellent “European Market Liquidity” Conference, organised by AFME (the industry voice for FX & Fixed Income).

The theme was summed up by the oft repeated phase from various speakers that

“A tsunami of regulation is headed your way”.

A few thoughts from the conference:

Engage with regulators: Whilst many proposed rule changes still lack detail, and in some cases timescales for implementations are ‘worryingly’ short, there is no doubt that the impact of Dodd Frank, MiFID II and Basel will have an enormous impact on many existing business models. In order to minimise the ‘unintended consequences’ of poorly drafted regulations undermining the efficient functioning of the market, it’s clear that the industry, and it’s various trade bodies must continue to lobby and ‘fully’ engage with regulators, to make sure that effective legislation is created.

Here are a few examples where the proposed introduction of regulation creates more problems than it seeks to solve:

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BIS Data shows most CDS trades not be suitable for trading on a SEF


The Bank of International Settlements (BIS) today released data covering outstanding positions in the global OTC Derivatives markets.

Whilst overall outstanding OTC positions are down some 4% to $583 trillion, gross market value of existing OTC contracts rose by 15% to $25 trillion.

Notional amounts of Credit Default Swaps (CDS) outstanding declined for the 5th semiannual period (due to terminations of existing contracts).

Interesting to note that the BIS has for the first time included Central Counterparties (CCP) in the breakdown of outstanding contracts by counterparty for CDS positions. Although further reading shows that CCP accounted for only 11% of outstanding CDS positions. This relatively low figure reflecting the “non-standard” nature of much of the CDS positions captured by the BIS survey (see section 3.2 on page 6 of report).

So, if the vast majority of CDS positions are non-standard, and thus not suitable for clearing by CCP, does that not also imply that the vast majority of CDS trades would  therefore also be exempt from having to trade on a ‘SEF’?

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