Buyside confused over OTC regulation

Interesting article by Phil Davis in the FT today (registration required) about asset managers being required by Dodd-Frank to clear trades through a central counterparty. The article quotes David Field of Rule Financial. Rule have apparently conducted a buy-side survey which confirms several of the consensus opinions of the Clearing and Settlement Working Group (CAS-WG) (which I blogged about last week).

Field said:

The buyside is very confused about the timelines. We conducted a survey on this and answers ranged from September 2012 to December 2014. One even said December 2015.

The article concludes that the buy side is unaware of the timeline and is also unprepared for having to post collateral on deals for the first time.

Interesting read.

CDS research from FRBNY

Last week the Federal Reserve Bank of New York published some detailed research on traded volumes of CDS in May-Sep 2010. Some analysis I saw in the WSJ reinforced our earlier views that the traded volume is *extremely* thin & therefore the rationale of a forced multi-dealer trading facility, i.e., SEF, is tenuous at best.

Further analysis by the FT Alphaville team is here. Have a look – you may be surprised!

New bill may restore sanity to SEF regulations

Just noticed this announcement:

Chairman of Financial Services Subcommittee on Capital Markets Scott Garrett, is introducing a bill (H.R. 2586) “the Swap Execution Facility Clarification Act”, which will require the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to finalize swap execution facilities (SEFs) rules that allow the swaps market to naturally evolve towards Continue reading

Making Swap Execution Facilities (SEFs) successful (CFTC roundtable)

I know it’s a bit late, but back in March the CFTC (Scott O’Malia) held public meetings to explore the ‘attributes necessary to make swap execution facilities (SEFs) successful’.

The round table discussions were fascinating to watch, as market participants attempted to explain to the CFTC the subtle (and very often inverse) relationships (read trade-off) between (forced) transparency and (true) liquidity, worth watching here.

Tabb group also provided a report on the technology implications and costs of Dodd Frank on Financial Markets., showing that they estimated that the largest dealers (top 15 firms) would spend some $1.8bln on restructuring their businesses for Dodd Frank, of which some $560mln would be spent on e-commerce and low touch distribution.

The SEF showcase was followed up by a number of presentations from market participants and potential SEF providers, highlighting issues and value propositions. This one from BlackRock, is worth going throughDodd-Frank Derivatives Regulation Interconnectivity

Poll results confirm, Single Dealer Platforms best positioned to provide SEF routing capabilities

We have been running a poll asking whether Single Dealer Platforms should provide routing through to SEFs.

The results are shown below, and not unsurprisingly the majority of voters thought that SDPs should provide an aggregated view of SEF liquidity, and order routing capabilities.

Our survey echos the findings of a similar poll carried out during live Webcast last week on Regulation and OTC e-commerce: Future-proofing your systems (may require password), with some 80% of voters suggesting that Single Dealer Platforms will become more important rather than less important as new trading regulations unfold. Actual webcast available here

Dodd Frank/SEFs may drive FIX adoption as electronic trading protocol for Fixed Income

Major sell side firms see the potential for the FIX protocol to become the electronic trading standard for emerging swap execution facilities (SEFs) in the OTC derivatives market, according to Courtney Doyle McGuinn, FPL Operations Director, who spoke with Wall street & Technology at the SIFMA event in New York yesterday.

However, the usage of FIX in fixed income markets is still lagging even though the tags for fixed income have been available in FIX since the 2002/2003 time frame, partly because assets managers call up their brokers to execute a trade.

However, momentum for adopting FIX for fixed-income is building as a result of the Dodd-Frank financial reforms which is seeking greater market transparency by requiring most types of OTC derivatives to clear through central counterparty facilities and trade on swaps execution facilities or SEFs. A surge in new market trading venues is expected within the U.S. and similar reforms are expected from upcoming MiFID II regulations in Europe.

rest of story here

Smart Order Routing to SEFs – just what’s needed for Single Dealer Platforms

RTS today announced their new central order routing and execution system, which sounds like could be useful for banks looking to provide SEF routing via their single dealer platforms.

Products traded and matched on RTD CORE will include equities, futures, options, foreign exchange, interest rates and custom OTC products. Clients can include exchanges, OTC platforms, brokerage firms, supply chain management firms, commodity trading houses, hedge desks and swap execution facilities (SEFs) created by the Dodd-Frank Act, among others.

Single-Dealer Platforms grow in importance

It is interesting that, following Paul Blank’s post on May 29th suggesting that single-dealer platforms are fighting back against SEFs, the audience at yesterday’s Waters webcast seemed to agree.

Yesterday (June 7 2011) Waters hosted an audio webcast entitled, “Regulation and OTC e-Commerce: Future-proofing your systems”. Sponsored by Caplin Systems, and hosted by Rob Daly, editor of Waters’ publication Sell-Side Technology, the panel for the webcast included Stéphane Malrait of Société Generale, David Bullen of Citi and Nick Green of Crédit Agricole.

The first audience participation question was, “Do you see a direct electronic channel to market being 1) more or 2) less important in this new regulatory environment?”

82% of the audience decided that in the new regulatory environment a direct electronic channel to market will be MORE important than it is now.

This is clearly good news for those of us engaged in building electronic channels to market for broker/dealers.

For those who missed it, an on-demand recording of the full audio webcast will be available online in a week or so. As soon as it’s available I’ll post the link.

Should Single Dealer Platforms provide SEF routing capabilities? (New Poll – vote NOW)

Poll Question:

Following my last blog post which looked at Single Dealer Platforms fighting back against SEFs by providing SEF routing capabilities, I thought we could get some reader participation on the topic, by asking the following question.

Results to be published next week.

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.