Here’s the first snippit of the panel I moderated at our Fixed Income Trading event on January 24th. Both Citi and BAML discuss the increases in electronic swaps trading that they’ve seen on the CDS desk in the past year. We’re not even close to the electronic market that Dodd-Frank will ultimately mandate, but it is clear that the move to the screen has already begun (albeit slowly).
I recently spoke with Rashad Kurbanov who is a Managing Director at consulting firm Investance in NY. We had an interesting discussion about how the credit markets might evolve in the coming months, with corporate bonds impacting CDS liquidity and vice versa. This is a topic I will continue to dig into in great detail in the coming months via my research at TABB Group. Until then:
I was lucky enough to get a demo of this platform a few weeks ago. Its very impressive, and a sign of things to come in fixed income. Not just for cash markets, but for automated market making in the swaps market as well. I suspect we’ll see similiar product announcements from competing forms in the not too distant future.
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NEW YORK, Jan. 31, 2012 /PRNewswire via COMTEX/ — Credit Suisse is proud to introduce Credit Suisse Onyx Streaming, a new way of trading Cash U.S. Treasury securities which offers clients the ability to i
nstantly trade on live, transparent and executable two-way streaming markets, all with a single click of a mouse. Onyx Streaming is a significant step forward in electronic trade execution for U.S. Treasuries that reflects many of the advances seen in other electronic markets such as equities, futures and foreign exchange.
Traditionally, electronic trading of U.S. Treasuries between dealers and clients has been executed using Request-For-Quote (RFQ) protocols in which clients manually request a one-sided price and wait for responses from one or more dealers. While RFQ is appropriate for many types of trades, Onyx Streaming is a dynamic new tool for traders looking for quick, decisive transactions. With Streaming, clients choose from a range of maturities, enter a size, and instantaneously see an executable two-sided market over Credit Suisse’s award-wining PrimeTrade platform.
“Onyx Streaming is another example of Credit Suisse’s commitment to giving clients access to liquidity using highly innovative technologies,” says Jon Kinol, Global Head of Rates at Credit Suisse. “The fixed income markets are accelerating their shift toward electronic trading, and we are committed to leading the way.”
“The U.S. Treasury market is one of the most liquid in the world, which leaves us to wonder why clients have for so long been without the ability to trade electronically directly with a dealer on firm, continuously streaming prices, as is common in the interdealer market. Continued volatility in the global economy has made direct access to firm prices all the more critical, and innovations in trading technology make that possible,” says Kevin McPartland, Principal and Director of Fixed Income Research at TABB Group, a financial markets research and strategic advisory firm.
Streaming U.S. Treasury trading further solidifies the position of Credit Suisse Onyx as the market’s leading fixed income trading platform for interest rate products, offering innovative algorithmic trading, outright cash Treasury trading, and access to Clearwater, the bank’s immense aggregated pool of liquidity.
“Looking at other markets such as FX has shown us that many clients prefer to trade in ways other than RFQ when they value transparency, certainty, and speed of execution,” says Ryan Sheftel, Head of Electronic Market Making for Global Rates at Credit Suisse. “We offer our clients a full spectrum of trading capabilities so that they always have access to the most advanced solutions that fit their needs.”
Credit Suisse Onyx is a key element of Credit Suisse PLUS, the bank’s innovative source of client focused electronic solutions that span research, analytics and trading.
Credit Suisse
Credit Suisse is one of the world’s leading financial services providers and is part of the Credit Suisse group of companies (referred to here as ‘Credit Suisse’). As an integrated bank, Credit Suisse offers clients its combined expertise in the areas of private banking, investment banking and asset management. Credit Suisse provides advisory services, comprehensive solutions and innovative products to companies, institutional clients and high-net-worth private clients globally, as well as to retail clients in Switzerland. Credit Suisse is headquartered in Zurich and operates in over 50 countries worldwide. The group employs approximately 50,700 people. The registered shares (CSGN) of Credit Suisse’s parent company, Credit Suisse Group AG, are listed in Switzerland and, in the form of American Depositary Shares (CS), in New York. Further information about Credit Suisse can be found at www.credit-suisse.com .
SOURCE Credit Suisse AG
Copyright (C) 2012 PR Newswire. All rights reserved
On Tuesday, January 24th we held our Fixed Inco
me Trading 2012 event. Over 450 people attended to hear three panels, one armchair interview and an economist keynote which provided a someone positive picture for 2012.
Wall Street & Technology posted a good, quick recap of what was discussed at the event. We have also posted several behind the scenes interviews with the panelists and speakers.
My short intro at the event explains the tone of the afternoon:
When we gathered here a year ago, on January 26th to be precise,the CFTC had just proposed its final Dodd-Frank inspired rule.
Much of that afternoon was spent debating the pros and cons of the proposals and what the various rules would do to liquidity and competition amongst market participants.
If you recall, we ended the day expecting – well, maybe hoping, really – that by time we held our next TabbFORUM conference, that trading and clearing mandates would be in place and we could discuss how the market had changed.
That was then and this is now and that rather optimistic prediction unfortunately hasn’t come true.
However, I’m sure you’ll all agree, the fixed-income world has in fact changed quite a bit during the past 12 months.
– a few rules have actually been set in stone…
– Electronic trading in a few swaps products has taken off, finally…
– And according to some, the U.S. Government is no longer a risk-free investment.Our goal today is to not have a regulatory debate, but instead discuss what’s actually happening in the fixed-income market today, and how macro and micro events across the world’s landscape will impact how market participants trade, invest, innovate … and make money.
Over the next few weeks I’ll post some of the video from the day on Kevin on the Street and most of the event in some way, shape or form will be available on TabbFORUM, so keep an eye out.
Now that we have the 2012 event behind us, its time for me to get back to work. Thanks everyone who attended, sponsored and helped.
The FT published a great special section this past Monday on the state of OTC derivatives reform. Coverage ranged from the im
pact of MF Global on margin and segregation rules to technology innovation driven by the new rules. What these stories all reaffirm is how much the details of the final rules will impact liquidity, product selection, the growth of electronic trading and what set of tools will ultimatey be most valuable in helping market participants come out on top.
“As volatility alone can cause rapid intra-day deterioration of major counterparty credit quality, a move
towards near-time or realtime clearing is inevitable anyway,” said Kevin
McPartland, fixed income analyst at Tabb Group, in a report last year.…
“Some of the most contentious rule proposals are those that will impact
liquidity fragmentation the most,” says Kevin McPartland, [Principal] at Tabb Group.
The full feature is available at FT.com
January was a good month for corporate bonds. Investors are desperate for yield and the issuers want to be sure to take advantage of historically low
rates. Even though half the world is scared of banks, it seems even they can borrow money pretty cheaply these days. My favorite bond issue of January is SABMiller, because its always good when someone is investing in beer production.
But in all seriousness, while this is all good news its hard to feel confident that the mood will last. The market is fickle and often irrational lately – if Merkel says the wrong thing tomorrow this call all go in the other direction. But here’s to hoping this is all a sign of good things to come in 2012.
“Because the markets are very volatile, more than what happened a month ago or will happen a month from now, what matters is what’s happening right now,” Kevin McPartland, director of fixed-income research for financial markets research firm TABB Group said.
And there’s always the allure of an almost-free lunch. “Funding is cheap so there’s a lot of incentive to tap the markets now … even if they don’t have anything to do with the money,” McPartland said.
Read the full article at ibtimes.com
 Our 2012 Fixed Income Trading event is taking place on Tuesday January 24th. We have a great agenda for the afternoon that should shed some light on what the major players in the fixed income markets are thinking about liquidity, derivatives reform, the sovereign debt crisis and a whole host of other issues we’re currently facing. Here I talk to Greg Crawford about what you can expect from the event:
Historical Data and First-Hand Accounts of Change in FX, US Treasuries and Institutional Equities Demonstrates How Technology and Regulation, or Lack Thereof, Will Cause Swaps Liquidity to Fragment
NEW YORK & LONDON, January 18, 2012 – 
Despite the fact that swaps execution facilities (SEFs) don’t technically exist yet and swaps market liquidity isn’t fragmented today, swaps dealers tell TABB Group in a new research report that they intend to spend millions to create, implement and market swaps liquidity aggregation systems to their buy-side client base.
According to Kevin McPartland, a TABB principal, director of fixed income research and author of “Swaps Liquidity Aggregation: Best Execution to Product Selection,” liquidity in the most liquid parts of the swaps market is going to fragment. “Whether there will be three or as many as 10 SEFs per asset class remains unclear, but finding the size you need at the right price will become less about who you know and more about the quality of your aggregation technology.”
The new report is based upon conversations with swaps dealers, proprietary trading firms, hedge funds, swap-execution facilities and technology providers. It examines historic precedent for market automation and liquidity fragmentation and the impact of proposed regulation and technology innovation on swaps market liquidity. The report also examines approaches being utilized to re-aggregate swaps liquidity via SEF aggregation technology.
Most swaps dealers and some forward-looking technology providers are already building aggregation system solutions, a step not taken without risk, says McPartland, explaining that locking down budget to solve a problem that hasn’t yet presented itself is no easy task given ongoing layoffs and the global economic crisis. “Swap trading desks are asking their budget committees for tens of millions of dollars to build technology to aggregate liquidity in a market that isn’t actually fragmented – yet. It’s a tough sell, but it shouldn’t be. By providing these new liquidity-seeking tools to their buy-side clients, dealers can fight to maintain the screen real estate and relationships they’ve spent years obtaining.” TABB Group research shows that vanilla interest rate swaps (IRS) and index credit default swaps (CDS) will see the widest adoption of these new aggregation solutions.
Creation of liquidity aggregators will be easier said than done, warns McPartland. “Aggregating request for quote (RFG) and order-book markets into a single view is no easy feat. Automating the inherent complexity of an experienced swaps trader’s decision-making process requires technology akin to artificial intelligence. And we can’t ignore regulatory uncertainty. Even if the final rules are passed early in 2012, industry lobbying and a change in the White House in 2013 could see the rules shift yet again. But the swaps market will fragment. The need for SEF aggregation is serious and it’s not going away.”
The 24-page report with nine exhibits is available to TABB Research Alliance Fixed Income clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to info@tabbgroup.com.
About TABB Group
TABB Group is the financial industry’s only strategic advisory and research firm focused solely on capital markets. Founded in 2003 and based on the proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb, TABB analyzes and quantifies the investing value chain from the fiduciary, investment manager and broker, to the exchange and custodian, helping clients gain a truer understanding of financial markets issues. For more information, visit www.tabbgroup.com. In January 2010, TABB launched TabbFORUM, the online capital markets community currently comprised of 10,500 members from buy-side and sell-side firms, exchanges, regulatory agencies, academia, consultants, vendors and media, focusing on issues covering current industry-wide topics.
Competition among swaps dealers young and old will be fierce, yet what constitutes a “dealer” still remains unclear. Defining “dealer” is important because those who register as Swaps Dealers will face tougher scrutiny-including more reporting and higher capital requi
rements-from regulators. And since the CFTC recently passed a few rules relating to Swap Dealer registration, I thought it would be a good time to review the issues.
There are two sides to the debate over what a “dealer” is: the regulatory definition and the practical definition. The most pronounced regulatory definition comes from the CFTC. According to the CFTC, activities that make someone a Swaps Dealer are:
1. Holding oneself out as a dealer in swaps or security-based swaps,
2. Making a market in swaps or security-based swaps,
3. Regularly entering into swaps or security-based swaps with counterparties as an ordinary course of business for one’s own account, or
4. Engaging in activity causing oneself to be commonly known in the trade as a dealer or market maker in swaps or security-based swaps.
Looking at this definition broadly, the most significant question is whether or not a firm that satisfies some, but not all, of these conditions should be required to register as a Swaps Dealer. Reporting, margin capital and other requirements for registered Swaps Dealers will likely be more onerous, so even firms that aspire to provide liquidity to clients will try to avoid the “capital S, capital D” label. It could be argued that being registered as a Swaps Dealer might act as an ironic competitive disadvantage. Principal Trading Groups (PTG), for example, fall into this bucket (see “Higher Frequency Swaps Trading: Market Making and Arbitrage,” August 2011).
Activity 2 would lead you to believe that PTGs making markets in swaps must, in fact, register as dealers. The bulge-bracket global banks agree. If a PTG is making markets in 10-year interest rate swaps, shouldn’t they be forced to meet the same requirements that major banks have to meet?
TABB Group research has found that this is not the view taken by some regulators in Washington. The “dealer” title is intended for systemically important and highly interconnected firms that trade both cleared and noncleared products. The CFTC proposal goes on to suggest that “dealers tend to be able to arrange customized terms for swaps or security-based swaps upon request, or to create new types of swaps or security-based swaps at the dealer’s own initiative.” None of those activities are, or likely ever will be, of interest to PTGs.
The story is different for banks and FCMs looking to get into the swaps market. In most cases, even if they could structure the business to avoid the Swap Dealer label doing so might not be such a good idea. Over 90% of participants in our US Swap Dealer study expect to register as Swaps Dealers, proof that even those who would prefer to avoid the additional regulatory oversight realize that registering is unavoidable, and probably even necessary to grow in this business (see Exhibit). Whether rational or not, when clients are looking for a dealer to help with their swaps trading, they want a Dealer, not a Major Swaps Participant. Perception in this business is reality.
The more interesting debate is the practical definition of “swaps dealer.” As TABB Group sees it, there are four main roles that swaps dealers will need to fill going forward: executing (agency) broker, market maker, clearing broker and prime broker. The first two roles describe what swaps dealer do today: They provide their clients with liquidity. In the new world, however, client facilitation and market making will likely be split in two, with the former helping clients find the liquidity they need on the appropriate SEF, and the latter acting more as a standalone trading operation.
We’ve already established that PTG market makers shouldn’t have to register as Swap Dealers, but what about an agency only swaps dealer that offers client execution services but requires they clear elsewhere? In that vein, what about those firms who plan to offer clearing and custody services but not engage in active swaps trading?
As new rules hit the Federal Register in the coming months these issues will start to become clearer. However, even when new regulations are final, identifying Swap Dealers from those simply looking for alpha with market making strategies will be complicated. The ultimate goal here should be to regulate systemically important firms and ensure a more level playing field, not to place overly burdensome registration requirements on everyone looking to trade swaps. Here’s to hoping.
Futures On Credit-Default Swaps Seen As Natural Evolution (Wall Street Journal)
If Congress really had its way (well, the Democrats anyway) than all swaps would have been forced to look and trade like futures.
If you’re reading this blog than you know that would be a classic square peg, round hole. Case in point: Eurex launched iTraxx futures some years back and no liquidity every developed. But times have changed, and although I’m not completely convinced the world needs credit-default swap (CDS) futures, the upside if the contracts are successful is big enough that it is nearly inevitable that they will come to market ahead of CDS trading and clearing mandates later in 2012. Why?
Firstly clearinghouse margin requirements for CDS are seen by many as unnecessarily high. Complications related to clearing sovereign and bank CDS, two of the most highly used CDS segments, will leave margin requirements for those products even higher than for index CDS. These high margin requirements alone could open the door for CDS futures as the margin requirements for futures are tracking much lower than for comparable swaps.
Hence my comments to Dow Jones. CDS futures won’t take off just because the market wants to take directional bets on credit, they’ll take off because they provide an economic incentive to those wanting to take direction bets on credit:
Kevin McPartland, principal at the independent research firm TABB Group, said these so-called “liquidity” issues would drive more trading in CDS and “that would only translate to demand for CDS futures” so long as they offered some economic benefits over the existing swap contract.
A dealer working on the CDX futures project said it could be a solution that would drive volumes because the contracts could be traded in smaller sizes than CDS, and this could appeal to investors not currently trading in swaps. “It’s something that makes sense,” he said.
Over the last few weeks the topic of CDS futures has come up a bit in my conversations with industry participants. In fact we discussed this back stage at our recent Fixed Income Trading 2012 event in New York on January 24th. Everyone seems convinced that several firms are “working on the problem”. However, a TABB Group estimated 80% of CDX.IG trading in the interdealer market happening electronically based on a highly standard contract (remember the Big Bang in 2009?) begs the question, with such a standard, relatively liquid market already in place why do we even need a future? Its nothing more than a different regulatory rubber stamp calling the product one thing over another.
It can even be argued that margin rates for cleared CDS and the comparable cleared CDS future should be the same. If they’re economically equivalent than why wouldn’t margin requirements be equivalent? That point leads to another discussion that I’ll come back to in the coming months.
The bottom line – someone will bring CDX.IG futures to market, but betting on their success is purely a game of chance. Only time will tell.
Read the full story at WSJ.com