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

Posted on January 17, 2016 by Paul Blank

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

Filed under: Dodd Frank, OTC, Paul Blank, Regulation, SEF | Leave a comment »

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

Posted on October 14, 2015 by Paul Blank

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 →

Filed under: Dodd Frank, Paul Blank, SEF, SWAPS | Leave a comment »

FX Platforms: Aug 15 vols surge on back of China volatility (EBS leads the pack, up 22%)

Posted on September 7, 2015 by Paul Blank

August saw a surge in volumes for major FX platforms, as the knock-on effects of the Chinese stock market free fall, spread to other markets causing sharp increase in FX volatility, driving up volumes.

Among the Top Tier platforms, EBS showed the largest gains, up 22.2% to $100.3bn/day, whilst Reuters Spot vols were up some 17.8% at $119bn/day, although Reuters ‘other products’ which include it’s SEF platform, were down -2.8% at $245bn/day. On the futures side, The CME showed a 21.5% increase across all FX products.

Among the second ranked platforms, Hotspot recorded a 20.4% increase to $28.3bn/day, whilst Fastmatch was up 14.5% at $9.2bn/day.

In terms of daily spikes in volumes, on 24th August, Hotspot saw daily volume surge to 59bn/day, and Fastmatch to over $20bn/day (4th highest daily vol), in both cases about twice the monthly daily averages (neither Reuters nor EBS provided details of daily peak volumes for August). FXCM and GAIN yet to release Aug metrics. Continue reading →

Filed under: FX, Paul Blank, SEF | Leave a comment »

Regional banks looking at Fixed Income SDPs

Posted on October 28, 2014 by Paul Blank

The evolving regulatory regimes and mandates of Dodd-Frank, Volcker Rule, EMIR, MiFid II and Basel capital reforms are designed to increase transparency, reduce risk and drive OTC derivatives markets onto transparent and regulated markets and platforms.

As a result banks are radically changing, (and indeed cannibalizing) business models within the fixed income (FICC) businesses, pulling back or even withdrawing from more capital-intensive inventory based market-making activities in products such as credits as they move towards what is called a ‘capital light operating model’.

Banks are now specialising around core skills, value propositions and client franchise, with a reduction in those willing to be flow banks, whilst others specialise in execution capabilities around an agency model. As a result, clients will be offered execution services from banks that will be a blend of principal/agency, bilateral/cleared, all of which requiring investment by dealers in new technology and connectivity pipes to execution venues such as SEFs, post-trade reporting (TR) repositories, central clearing houses (CCPs) and more.

So, what’s happening in Europe in terms of fixed income e-trading, and in particular what’s the future for single-dealer platforms in fixed income? Continue reading →

Filed under: Paul Blank, SEF, Single-Dealer Platforms, SWAPS | Leave a comment »

Incentives for Central Clearing – paper by BIS

Posted on October 6, 2014 by Paul Blank

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 →

Filed under: CCP, Dodd Frank, OTC, Paul Blank, SEF, Web trading technology | Leave a comment »

Are Europe and US moving closer to NDF clearing mandates?

Posted on October 3, 2014 by Paul Blank

Could clearing mandate for NDFs be closer that we think?

Europe has tended to lag the US by about 18 months in implementing regulatory reforms in general, and trading and clearing mandates in particular.

So, the timing this week of a new consultation paper by The European Securities and Markets Authority (ESMA) on mandatory clearing of swaps and Non-Deliverable Forwards (NDFs) is potentially significant, as it could suggest a more rapid convergence between Europe and US on NDF clearing mandates.

The reason for this is that the paper has been published barely a week before Continue reading →

Filed under: Paul Blank, Regulation, SEF, Web trading technology | Leave a comment »

New investment banking models: ‘capital-lite’, ‘agency’ and ‘client-clearing’

Posted on July 24, 2014 by Paul Blank

Regulation is driving change in capital market structure, and as highlighted in the future of investment banking, banks continue to move towards a ‘capital-lite’ business model, as they seek to ‘optimise’ use of and return on capital.

The introduction of mandatory trading and clearing for standardised swaps (SEFs in US and OTF and MTFs in Europe) has resulted in higher capital charges for OTC bilateral trades, and reduced the appetite of banks to warehouse and hold inventory which is moving more banks towards a ‘capital lite’ model.

This is the backdrop to the announcement that JP Morgan the setting up a 150 strong fixed income agency execution desk called JP Morgan Execution Services (JPMES), to run alongside its principal trading operations.

At first sight, it looks as if JP Morgan is simply hedging its bets and backing both agency and principal business models. However,
Continue reading →

Filed under: CCP, OTF, Paul Blank, Regulation, SEF, SWAPS, Web trading technology | 1 Comment »

How many SEFs will the market support?

Posted on March 13, 2014 by Paul Blank

There is a great post by Amir Khwaja of Clarus Financial over on Tabb Forum. Amir looks at the current SEF volumes and asks some questions about how many SEFs can the market support.

Continue reading →

Filed under: Paul Blank, SEF, SWAPS | Leave a comment »

European Market Liquidity Conference – thoughts and comments

Posted on March 3, 2014 by Paul Blank

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 →

Filed under: CCP, Dodd Frank, FX, OTC, OTF, Paul Blank, Regulation, SEF, SWAPS | 1 Comment »

Single-Dealer Platforms and SEFs

Posted on February 21, 2014 by Paul Blank

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 →

Filed under: CEP, CFTC, Dodd Frank, OTC, Paul Blank, Regulation, SEF, SWAPS | 1 Comment »

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