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June 1, 2012

SEF Battles Are Coming, Celent Predicts

By Editorial Staff

Many will be called. Few will be chosen.

That's the analysis of a recent Celent report on pending swap execution facilities, which are a part of the Dodd-Frank law of 2010 to reduce risk in over-the-counter derivative transactions, or swaps.

Dozens of firms have applications pending to become SEFs or OTFs, which are organized trading facilities. But the Celent report, "Swap Execution Facilities: Opportunities in the Institutional Marketplace," predicts only a handful of firms with extensive experience in swaps will survive.

"We will need an increase in trading to support all the announced SEF/OTFs," says the report. It says firms are trying to predict what will be the final outcome of SEF rules.

"You have to really want to be a SEF, so commitment must be high," the report says.

The report predicts that "incumbent" dealers will most likely be the survivors of this process. And if a would-be SEF player has any question over whether to compete, the report offers a series of questions to consider.

"First, is their platform differentiated? Will there be sufficient volume to cover the costs of upgrades, technology development, building relationships and marketing over time?" the report asks. "Just how many SEFs can any market support, and will customers really go to the effort to connect and route their orders to the new SEF?"

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