Principal Trading Groups (PTGs) Set to Act as Market Makers for Interest Rate and Credit Default Swaps

Principal Trading Groups (PTGs) Set to Act as Market Makers for Interest Rate and Credit Default Swaps, Says TABB

Clearing Access and ‘Click-to-Trade’ Will Make or Break PTG Swaps Market Entry Following Dodd-Frank Reform Rules Implementation

NEW YORK & LONDON, July 19 2011 – Financial regulatory reform efforts covering over-the-counter (OTC) derivatives are setting the stage for long overdue market innovation.  In new research published today, “Higher Frequency Swaps Trading: Marketing Making and Arbitrage,” TABB Group says that principal trading groups (PTGs) – firms that flourish in highly liquid, highly electronic markets – are set to act as market makers for interest rate swaps (IRS) and credit default swaps (CDS).

Although statistical arbitrage will exist in the new swaps market, it will be slower to develop.  “Arbitrage trading strategies, however, will follow quickly when automated market-making meets an already liquid market backed by real money trades, with the more exciting opportunities for those firms playing a part in the futures and cash markets,” writes Kevin McPartland, a TABB principal, director of fixed income research and author of the new report.  He says that “Trading, clearing and reporting mandates need to be in place so that market and trade data can be generated sufficiently and available publicly to make stat arb trading accessible to most PTGs.”

Despite the near certainty that swap execution facility (SEF) trading and central clearing will be mandated for at least the most vanilla products, operational complexities of that model are still unresolved, he explains. “Unsolved and nuanced details of proposed rules could still leave barriers to entry excessively high.”   He adds it is fundamentally essential that PTGs looking to enter the swaps business need access to clearing, which makes it easier to trade in and out of a position quickly and eliminates the requirement that all trading counterparties have AAA credit ratings.  Clearing also allows SEFs to operate with anonymous executions.  According to McPartland, “if ‘click’ doesn’t equal ‘trade’ and bilateral agreements are still required of both counterparties, the PTGs’ entrance into these markets would be crippled, if not altogether killed.”

The report goes on to discuss why these conditions are critical to PTG strategies and explains why TABB sees PTGs driving nearly one third of trading volume in OTC energy swaps markets, but not in other swaps markets.

Given the realities of the political world, the financial markets will probably not see full implementation of OTC derivatives reform rules wrap-up until at least 2013. “The groundwork, however, is set and there’s no turning back,” says McPartland.  “The pre-SEF era is upon us and electronic swaps trading will see slow growth over the coming months.”

They key to opening the door for PTGs and dozens of firms looking to trade swaps is centered on access to clearing, and no matter what happens in the regulators’ conference rooms in Washington and Brussels, TABB believes that PTGs will enhance liquidity in this marketplace as they have elsewhere. “The only question,” McPartland says, “is, by how much?”

The 18-page research report with 6 exhibits is available for download by TABB Group Research Alliance Derivatives clients and pre-qualified media at  For an executive summary or to purchase the report, visit or write to

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 Group analyzes and quantifies the investing value chain from the fiduciary, investment manager, broker, exchange and custodian, helping senior business leaders gain a truer understanding of financial markets issues.  For more information, visit   In January 2010, TABB Group launched TabbFORUM, the online community currently with more than 8,000 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.

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