The FT published a great special section this past Monday on the state of OTC derivatives reform. Coverage ranged from the impact 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.
- SEF or OTF: A Comparison of Swaps Trading Reform in the US and Europe
- SEF 101: Deconstructing the Swap Execution Facility
- Buy Side OMS and EMS: Integration, Expansion and Consolidation
- Talking to the Swap Execution Facilities
- A conversation with Chris Ferreri, MD of Hybrid Brokerage at ICAP
- A conversation with Jim Toffey, CEO of Benchmark Solutions
- A conversation with Lee Olesky, CEO of Tradeweb
- A conversation with equity SEF eDeriv
- A conversation with Rick McVey, CEO of MarketAxess
- A conversation with Jamie Cawley, CEO of Javelin
It seemed like the CFTC’s meeting yesterday (Dec 12th) would be a big one; we’d find out the size of a block trade and in doing so get some insight into how truly electronic the swaps market would become. Â Unfortunately, the can has been kicked down the road again. Â Instead we have a seemingly temporary 30 minute reporting delay for all trades (until block trades are defined) and confirmation that all trades must be reported (a noÂ brainer).
My comments in the Wall Street Journal could have used a little qualifying, as they sound a bit generic out of context (of course market data exists today), but if you’ve read any of my other research you know where I’m coming from. Â Here’s to hoping this market actually can get moving in 2012.
Swaps market analyst Kevin McPartland, a principal with research-firm TABB Group, said the new rules will greatly increase amount of available data on each trade. “We’re going from a world where there was almost no market data to a world where it will be regulated into existence,” Mr. McPartland said, adding that now “everyone will have streaming data on these markets.” He estimates that the Dodd-Frank derivatives regulations will cost the industry $1.8 billion in total but hasn’t separated out the cost for the data rules.
Read the full story here:Â http://on.wsj.com/tszLKA
With so much focus on execution methods and block trade rules, little talk has been had about another SEF requirement: surveillance. Keeping your market participants in line is no small task. Here is what Javelin is doing to tackle the surveillance requirements.
On Tuesday, December 13th I presented to the CFTC Technology Advisory Committee. Chairman Gensler and Commissioners O’Malia and Wetjan were all there. Each panelist, myself included, gave a 15 minute opening and then we participated in an open Q&A with the Chairman, Commissioners and the members of the TAC.
Maybe I’m just optimistic, but it felt like we actually got somewhere. Chairmen Gensler probed me on the number of SEFs, the importance to dealers of building electronic connectivity to clients and the impact smaller order sizes will have on clearing costs. The other big topics of the morning were order interaction rules and the 15 second rule (which no one but the Chairman seems to support).
The biggest policy question I came out of the meeting asking was will the order interaction rules – requiring the RFQ and order book parts of a SEF to interact – be proposed and passed. I suspect they will still be proposed, but with language that makes using the linkage optional for users. More on this in the coming weeks.
And on a slightly related note, the CFTC just released its proposal defining “made available for trading.” Defining this turn is a pretty critical part in determining how electronic and liquid the post-DFA swaps market will become.
My opening starts about 24 minutes in. Enjoy.
This is the PR for my latest SEF report, for which the executive summary can be found here.
Dec. 8, 2011, 9:33 a.m. EST
Skepticism Grows across the Swaps Markets about Benefits of SEFs Due to Overly Prescriptive Rules, Says TABB
Over 200 Swaps Market Professionals Rate the Top Firms They Believe Will Succeed as SEFs for Rates, Credit, Equity, Energy and FX Asset Classes
NEW YORK & LONDON, Dec 08, 2011 (BUSINESS WIRE) — Three years after the Lehman bankruptcy and one year since the Dodd-Frank Act was enacted, swaps market industry professionals tell TABB Group that overly prescriptive swap execution facility (SEF) rules, specifically the 15-second rule and the 5 RFQ requirement among others, will have a negative impact on liquidity.
According to new research released publicly today, “SEF Industry Barometer: Fall 2011,” skepticism is rising across the swaps markets concerning the benefit of implementing SEFs, says Kevin McPartland, report author, a TABB principal and director of fixed income research. The report’s analysis is based on responses from over 200 buy-side and sell-side market participants in the US and Europe, including dealers, SEFs, interdealer brokers, asset managers, proprietary traders, hedge funds, commercial end users, G14 and non-G14 global investment banks and agency brokers, futures commission merchants (FCMs), IT providers, exchange/clearinghouses and consultants.
Although the CFTC and SEC expect to begin the implementing SEF trading mandates by the third quarter of 2012, over 80% questioned do not expect implementation until 2013. Asked if they believe that SEF formation will be good for the swaps market, nearly three quarters said yes but this is down from 87% as reported in TABB’s April 2011 report, “Swap Execution Facilities: An Industry Barometer,” also written by McPartland.
“Trade sizes for credit default swaps (CDS) and interest rate swaps (IRS) are expected to see the most dramatic decline during the next five years,” McPartland says. Average trade sizes in every asset class — credit, energy, equity, FX and rates — are expected to decline by at least 25%. “The biggest decline is expected in rates and credit.”
Despite concerns regarding overly prescriptive regulation, McPartland points out that there is no lack of interest in this industry sector. Over 43 firms have expressed an interest in creating a SEF, a list available to TABB Fixed Income Research Alliance subscription-based clients and individual firms purchasing the report. Asked who they believe will be successful ultimately as a SEF in each asset class, the participants named the following firms: Bloomberg, CBOE, CME Clearport , CreditEx, FXAll, ICE OTC Energy , ICAP , MarketAxess and Tradeweb.
The complete list of 52 rankings broken down by asset class can be viewed by TABB clients and firms purchasing the report.
“Although we still see little clarity as to how the swaps market will function going forward,” McPartland explains, “that has not prevented the swaps industry from innovating and creating new business models and technology to ensure liquidity in the swaps market remains, despite the frustrating regulatory uncertainty.”
The SEF report with over 20 detailed exhibits is available for download by TABB Group Fixed Income Research Alliance clients and all 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 email@example.com.
About TABB Group
TABB Group is the financial industry’s 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 to help senior business leaders gain a truer understanding of financial markets issues. For more information, visit www.tabbgroup.com . In January 2010, TABB Group launched TabbFORUM, the online community currently with nearly 10,500 capital markets members, drawn from buy-side and sell-side firms, exchanges, regulatory agencies, academia, consultants, vendors and media, focusing on issues covering current industry-wide topics.
SOURCE: TABB Group
martinrabkinink Martin Rabkin, 914-420-5739 firstname.lastname@example.org
MF Global and the Euro crisis have made people think about counterparty risk again. Counterparty risk concerns are good for clearing, and Swapclear US is all over it. Here are I talk to its US head Dan Maguire about their enhanced functionality, success to date and the “fun” Dan had living through Lehman.
I’m not surprised that multiple firms are competing to be the swap data repository of choice. This is America after all, so if an opportunity exists (especially one created by government mandate) than several firms will go after it. However, I’m not sure I get the business model for running an SDR. Having control over swaps market data is certainly an asset to whichever firm has it, but as most of this data will be made public I’m not sure how valuable that asset ultimately is.
But while the repositories will certainly bring more visibility to the market, their impact on the earnings of the companies that offer them may be smaller. Kevin McPartland, a principal and director of fixed income research at TABB Group, told SNL it is still unclear how profitable providing reporting services would be. He said ICE could look to build out an analytics business on top of the swap data repository as another function in an end-to-end credit clearing business. Another potential business model could be in compiling data from different reporting organizations. “If we end up with multiple [reporting organizations] per region as could be the case, then it seems there could be a business of consolidating SDR data to get a full picture of the market,” he said.
Analytics on top of the data are one possibility. The other driver to run an SDR is not about direct revenue, but instead control. ICE probably figures why should I report my data to DTCC when I can just report it to myself?
A few months back we put out a research piece on clearing technology, and how despite a lot of work over the past few years, a big investment is still needed to bring OTC clearing to where it needs to be. And thankfully for those that sell clearing technology, regulations and continued fear of counterparty risk will ensure that investment will in fact happen. The subtitle to the aforementioned report explains the shift in mindset: "Bringing the Back Office to the Forefront".
But one problem is that while the industry knows clearing and transaction volumes will grow, it is unclear by much. Kevin McPartland, an analyst at Tabb Group, the US capital markets consultancy, estimates transaction volumes could increase twentyfold, and market data volumes up to 3-4 times above the current levels.
“As volatility alone can cause rapid intraday deterioration of major counterparty credit quality, a move towards near-time or real-time clearing is inevitable anyway,” said Mr McPartland in a recent report. “OTC derivatives transactions that once took days to clear and settle will be finalised in minutes, if not seconds.”