BofE study finds mandatory swaps trading on SEFs increases liquidity and lowers costs!

Some interesting findings from a paper from the Bank of England, which looked at the impact of mandatory trading on swap execution facilities (SEF), for interest rate swaps (IRS) as required under Dodd Frank Act.

The paper looked at transactional data from the USD and EUR segments of the plain vanilla IRS market. The findings showed that as a result of SEF trading:

  • Activity increases
  • Liquidity improves across the swap market
  • Improvement being largest for USD mandated contracts which are most affected by the mandate
  • The reduction in execution costs is economically significant
  • Execution costs in USD mandated contracts, drop for market end-users alone, by $3 million–$4 million daily relative to EUR mandated contracts and in total by about $7 million–$13 million daily
  • Inter-dealer activity drops concurrently with the improvement in liquidity suggesting that execution costs may have fallen because dealer intermediation chains became shorter

Overall, the results suggest that:

“The improvements in transparency brought about by the Dodd-Frank trading mandate have substantially improved interest rate swap market liquidity.

Finally, the report finds that the Dodd-Frank mandate caused the activity of the EUR segment of the market to geographically fragment. However, this does not appear to have compromised liquidity.


Full report here

More on non-bank liquidity providers (Citadel in Swaps)

Tougher regulatory requirements around capital and leverage ratios, and Volcker rules around prop trading, continue to reduce the ability and appetite of banks to provide principal based market-making activities, and warehouse risk. The more capital-intensive the product (such as inventory based corporate bonds), the less appetite banks have to provide such services.

As a consequence, there has been a reduction in levels of liquidity in some markets, resulting in increased volatility as market-makers are less able to provide immediacy risk transfer pricing and take large positions onto their books.

However, as banks step back, non-bank market-making firms are stepping up to the plate to provide those services. Which is why, back in September, I mentioned that the move by Zar Amrolia from (the Mighty) Deutsche Bank to the non-bank market maker XTX, was a sign of the times.

With that in mind, it’s interesting to read Continue reading

Incentives for Central Clearing – paper by BIS

The Bank of International Settlements (BIS) has released an interesting research paper which looks at the incentives for various market participants to centrally clear bilateral OTC derivative trades.

Following the financial crisis, G20 leaders agreed that standardised over-the-counter (OTC) derivatives contracts were to be cleared through central counterparties (CCPs). A number of regulatory reforms have been introduced that affect the incentives for central clearing of these contracts. These reforms include requirements to exchange initial and variation margin for non-centrally cleared derivatives exposures, standards relating to the measurement of counterparty credit risk for derivatives contracts, and capital requirements for bank exposures to CCPs.

The paper found that:

Clearing member banks (ie those institutions that clear directly with CCPs) have incentives to clear centrally.

Whilst central clearing incentives for market participants that clear indirectly (ie that are not directly clearing members of a CCP but clear through an intermediary that is a clearing member of a CCP) are less obvious and could not be comprehensively analysed on the basis of the data received in the quantitative analysis.

However, given that clearing members account for the bulk of derivatives trading, the conclusion of the analysis – there are incentives for them to clear centrally – indicates that the G20 objective on OTC derivatives reforms has, for the most part, been achieved.

Continue reading

European Market Liquidity Conference – thoughts and comments

Last week I attended the Association for Financial Markets in Europe (AFME) 9th annual European Market Liquidity Conference.

As always with AFME, there had some thoughtful speakers and topical panel discussions, as well as providing good forum for networking opportunities (including providing for the conference iPad’s pre-loaded with delegate names allowing you to reach out to them and make contact).

This year’s agenda focused on the new emerging market structures

  • Liquidity in the new regulated market – the changing market structure
  • Keynote address -Verena Ross, Exec Dir, ESMA
  • Foreign Exchange:
    The renminbi and other Asian currencies
    Impact of regulation on development of the FX market place
  • Fixed Income:
    Development of exchange capabilities
    Liquidity issue, what liquidity issue?
  • Funding European economic growth: the obstacles and opportunities

Below are my notes and some comments from the sessions that I attended: Continue reading

Single-Dealer Platforms and SEFs

This week saw the introduction of mandatory execution on new SEF platforms for certain standardised interest rate swaps. Such swaps will no longer be executed bilaterally between banks and their clients, but rather must be executed anonymously on SEFs.

The move to SEF trading has however been tentative, with many buy-side firms holding back, nonetheless by midweek some 74% of the 372 IRS trades were being executed on SEFs, according to data from Clarus.  Although there are 23 newly registered SEFs , the majority of business so far has tended to flow through to the incumbent inter-dealer platform SEFs.

But what about single-dealer platforms (SDP), how are banks managing the migration to SEF trading? Continue reading

Final Volcker Rules on Proprietary Trading

Five US agencies have released the final version of section 619 of the Dodd-Frank Act that governs proprietary trading, otherwise known as the “Volcker Rule”.

The five agencies being: Board of Governors of the Federal Reserve System, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Securities and Exchange Commission.

The rules would generally prohibit banks from:

  • Engaging in short term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account
  • Owning, sponsoring, or having certain relationships with hedge funds or private equity funds, referred to as ‘covered funds.’

The rules provide exemptions for certain activities which include; market making, underwriting, hedging, trading in certain government bonds, and organising and offering a hedge fund or private equity fund.

The rules however, limit these exemptions if they involve Continue reading

What next after SEFs?

Just finished listing to an interesting webcast on Global OTC market reforms, and where next after the US and SEFs?

Celent analyst Anshuman Jaswal, gave overview of market, SEF volumes to date, and possible differences in regulatory treatment and approach in Europe and Asia.

Some key points form slide deck and a couple of slides below.

SEF and OTFs are critical components in evolution of the market from OTC non-standardised bilaterally cleared to standardised electronically traded and centrally cleared swaps.

SEF-OTF shift to standardised swaps

Celent slide on shift to standardised swaps

In terms of SEF volumes Continue reading

Main SEFs in violation of equal access rules

Speaking at SEFCon IV conference in NY this week, Gary Gensler, Chairman of the CFTC said that Bloomberg, TradeWeb and MarketAxess are failing to provide impartial access as required under SEF rules.

The three main platforms, are giving the banks too much control over who their customers buy and sell with, in an attempt to preserve the existing dealer-client structure, and that they need to come inline with the CFTC equal access rules.

“What they are doing right now is a violation of Dodd-Frank and our rules,” he said at an event in New York. “They need to come into compliance,” he said. The limits at Tradeweb, MarketAxess and Bloomberg LP give an advantage to the dealers who created the swaps market in the 1980s, Gensler said. “They’re trying to keep exclusive to the dealers.”

More here on Bloomberg and Risk.Net and of course from Kevinonthestreet

Separately, Continue reading


Whilst Javelin and TrueEX as ‘new kids on the block’, may have been the first to register their made available to trade (MAT) products, it’s clear that SEF volumes are for now remaining on the established platforms which are already widely used by market participants.

According to data from Clarus the top SEFs by volume for each product class last week were:

  • CREDIT:  Bloomberg continues to post the most impressive scores in this asset class, consistently accounting for 70-80% of the daily volumes and 79% for the week overall.  GFI is the strongest IDB.
  • FX:  ICAP has the largest FX numbers.  The other 4 IDB’s join Reuters & 360T for a close battle between 2nd through 7th place.
  • IRD:  ICAP and Tullet take turns in the lead, with BGC in another photo-finish for 3rd.  The strength of ICAP’s and Tullet’s numbers appear to hinge on the weekly FRA reset volumes (RESET vs TP Match, respectively).

Whilst, Ben Macdonald, Bloomberg’s Head of Product and President of Bloomberg’s SEF announced that:

“In the first month of SEF trading, more than $280 billion in cross asset volume has been executed on our SEF and over 220 global firms. We will continue to work closely with our clients, who have used our trading platforms for years, to help them transition to today’s new regulatory environment.” more

Full Clarus report on last weeks SEF volumes is here.

CFTC extends No-Action letter for FX Swaps

Last Friday the CFTC issued a ‘no action letter’ extending until 29th November the ‘time-limited’ relief from certain Swap Data Reporting Requirements for FX Swaps, the products in focus being NDFs and FX Options.

The extension comes on the back of representations, including a very compelling letter from James Kemp, MD of The Global Foreign Exchange Division, setting out the reasons for requesting the extension. Reading the arguments, you can see how ill prepared the majority of SEFs are to assume their obligations, and why market participants are reluctant to migrate trading onto SEFs.

According to the letter:

Key risks which have materialized for the NDF and Options markets since October 2nd including:

  • Reduced Legal Certainty for FX Trades Executed on SEFs.

In contrast to the practices developed and implemented by market participants over the past fifteen years to provide legal certainty Continue reading