Trading systems | Swap execution facilities
environment by a series of regulatory initiatives around the world. With detail still to be thrashed out, market participants are jockeying for position in the new derivatives landscape. In the US, Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 creates swap execution facilities (SEFs), trading systems that enable eligible contract participants to trade on a multilateral basis. In Europe, the review of MiFID has created an equivalent entity – the organised trading facility (OTF) while similar reforms are under way in Singapore, Hong Kong and Tokyo.
T In general, the initiatives cover trading, clearing
and reporting of swaps transactions. The reporting element is designed to enable regulators to monitor risks that could be building up in the OTC derivatives market as well as to check whether any nefarious practices are taking place. On the clearing front, the general trend is to move away from bilateral processes and towards clearing via central counterparties.
The trading element, which is creating SEFs and OTFs, is where some players are getting excited. Matt Woodhams, head of electronic commerce at wholesale market brokerage GFI, says despite the lack of clarity regarding the rules for SEFs, there is likely to be a “mad rush” before the end
he non-standard, bilaterally cleared world of OTC derivatives is being dragged into a standardised, electronically traded
of this year of organisations registering to become SEFs. “The industry is not sitting on its hands. People are assuming that swaps trading will be more electronic and they are investing in electronic platforms and connectivity.”
This is a point on which James Rucker, credit and risk offi cer at MarketAxess, operator of an electronic bond and CDS platform, agrees. “It is not easy to formulate a response, because the rules are not fi nal but fi rms cannot afford to wait until the rules are in place. There is too much to do and if you wait, there will be only a short time to act.” MarketAxess has begun by putting trading
protocols in place, upgrading and improving existing protocols for its credit trading platform. These moves, says Rucker, will ensure that the fi rm can be a competitive SEF from the outset. “We want to be market-driven and follow our clients with these changes,” he says. “We are also building in functions around CDS clearing, enabling clients to choose their clearing house, for example.”
On the connectivity front, the company is building links to ICE and CME and will connect to “any clearing house that clears CDS”, he says. Links are also being established to swaps data repositories and futures commission merchants. The fi nal piece of the puzzle for MarketAxess is compliance and surveillance. “The National Futures Association will provide a number of surveillance services, but fi rms need to be connected into
“It is not easy to formulate a response, because the rules are not fi nal but fi rms cannot afford to wait until the rules are in place. There is too much to do and if you wait, there will be only a short time to act.” James Rucker, MarketAxess
Best Execution | Autumn 2012 41
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