Early data shows a select group of incumbents flying out of the gates in poll liquidity positions with the introduction of mandatory trading on Swap Execution Facilities (SEFs) the week of February 17, the final act in the Dodd-Frank implementation process, heralding a new era in swaps trading.
These are the findings in new research from Tabb Group analysts Radi Khasawneh and Colby Jenkins. In their report, SEFs Go Live: Incumbents Sitting Pretty, publicly-reported SEF data confirms that the vast majority of interest rate swaps (IRS) are traded on the traditional dealer-to-dealer (D2D) platforms, with 94 percent of SEF trades on average executed on these venues in the first four months of trading. The four largest interdealer brokers – ICAP, BGC, Tradition and Tullett Prebon – have an even split of market share.
According to Khasawneh and Jenkins, ICAP has the largest market share at 30 percent but that is a function of its strong start in October 2013. In the dealer-to-client (D2C) market, Bloomberg has dominated the early running, winning a 78 percent market share to Tradewebs 21 percent. The researchers noted that new entrant Javelin, whose Made Available to Trade (MAT) submission, was the first.
TABB Group believes interdealer volume is inflated, reflecting an overnight shift in dealer trading, and that this will rebalance over time as D2C volumes increase and new SEFs emerge, according to a press statement.
The situation is reversed in credit default swaps (CDS) where Bloomberg has dominated, executing more than 90 percent of CDS every month. In both cases, IRS and CDS, the data merely reflects pre-existed workflow that more easily transitioned onto SEFs. Bloombergs largely Request for Quote (RFQ) AllQ platform was widely used by credit market participants, while the inter-dealer venues report voice trades as well as electronic execution, reads the press statement.
Tabb Group cautions that However, there are still moving parts that may yet change the way flows have behaved to date, and they include:
– Both Bloomberg and Tradeweb have executed on-behalf-of agency trades for buy-side clients (after updating their rulebooks to recognize this last week), while ICE had already incorporated that functionality.
– UBS has also connected its agency offering to Eris interest rate futures platforms, adding to its SEF network that will begin streaming prices on the mandatory date.
– This form of trading negates the heavy technology and legal spend that asset managers with direct connectivity have had to undergo and the ability to avoid analyzing rulebooks.
The data so far suggests that the status quo has continued with SEF adoption, although the trades are not split out by execution type, reports Tabb Group.
Indications from market participants are that the onboarding process has been less smooth than anticipated, which is why TABB believes there is likely to be a gradual rather than explosive growth as teething problems are resolved and MAT determinations take effect, according to Tabb Group.