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.

AFME Buyside Fixed Income Surveys

The Association For Financial Markets Europe AFME (the old SIFMA), produce what is becoming a good benchmark annual survey of etrading trends in the European Fixed Income Markets.

The 6th Annual survey was released in February  and I have been meaning to blog about it for ages, but never found the time!

The survey is excellent, and includes buyside, sellside and vendors and examines the factors and motivations that affect decisions to trade electronically across various fixed income products, and the impact of etrading on bank – client relationships. Certainly worth going through the slides.

The the survey was carried out last year, before much of the detail on Dodd Frank was known, so it will be interesting to see how the impact of Dodd Frank regulations affects future surveys.

Charts below show the top factors for BuySide in deciding to:

Trading electronically: Speed of Execution, Price Transparency
Trade by voice: Ticket Size, Liquidity

Previous years surveys are also available

Deutsche considered registering Autobahn as a SEF (they should have read our blog!)

Very interesting story in Risk.Net today about high level internal discussions at Deutsche Bank last year with regard to whether the bank should register AutoBahn as a SEF and invite other banks to post prices on the platform.

Rhom Ram, head of Autobahn at the bank in London, said:

“We looked at it pretty closely, but couldn’t see how it would be an attractive proposition on its own because the end result would look like Tradeweb. The reason people choose Autobahn is because Deutsche is standing behind it,” he says.

“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 as a way to separate ourselves from the SEFs,” he says.

(sorry, but full story may be password protected)

Again this highlights Caplin’s consistent view that Single Dealer Platform are the ideal route to SEFs

SDPs best route to SEF – confirmed by results of FX-Week survey!

Throughout the SEF debate, Caplin has been consistently saying that Single Dealer Platforms will remain the dominant relationship channel of choice, through which clients will continue to manage risk, access liquidity and execute trades, either directly with their relationship bank, or routed by the bank through to a SEF for those cleared products that are trading on a SEF.

So, it’s reassuring to see that the results of the latest FXWeek Poll, clearly supports our long-held view.

The poll asked what will be the role of Single Dealer Platforms under Dodd Frank.

A) To sell equity to other banks so that they can stream multiple quotes and comply with required Sef criteria (12%)

B) To act as an agent, aggregating prices from Sefs and other trading venues and routing client demand to the best sources of liquidity (76%)

C) To accept that they may lose some business in contracts required to be traded on a Sef (12%)

So, there you have it. Single Dealer Platforms, where required will, route client trades to SEFs

SDPs are natural route to SEF (as we have been saying all along)

Interesting story today by IFR-FX trade morphs as new regulations loom

The thrust of the article being that FX business models of banks (and clients) will need to be overhauled in the face of the shifting regulatory landscape, and that Bank Single Dealer Platforms (SDP) will need to adapt to support new routing protocols to SEFs, Central Clearing Houses (CCPs) and Trade Repositories.

At Caplin, we have been consistently saying that Single Dealer Platforms will remain the relationship channel of choice, through which banks enable clients to manage risk, and access liquidity, whether directly from the bank, or routed through to SEFs for cleared products.

Infact, a few of the quotes in the article could almost have been lifted from my earlier blogs such as:

Kevin Richards Global Head of FX Derivs, Spot and e-trading at Deutsche: “Certain products in certain jurisdictions with certain clients will go to an exchange, similar to the equities world“.

Vincent Craignou Head of FX, Metals and Derivs at HSBC: “In any case, e-commerce platforms will still add value regardless of the final SEF definition, said Vincent Craignou, head of FX and precious metals derivatives at HSBC in London. For example, single-dealer platforms can be used to route to SEFs, he said, and clients should still be able to glean value from the platform’s execution and risk management capabilities”

My Blog on 6th may 2011:

Route to SEF (for NDF/FX Options): Like with equities or futures, banks should prepare to enable clients to request price quotes for NDFs/FX options, and where those instruments mandated to (and actually are available) on a SEF, then route the request to the SEF, otherwise the bank will continue to quote, but all done from within the SDP

Good to know great minds think alike!

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.

etrading trends research by GreySpark

GreySpark (in conjunction with Best Execution) have released a detailed study on the trends in etrading.

It dispels some common industry myths… Continue reading