Research | SEFs Impact assessment
At the end of September, GreySpark Partners published the final report of a three part series on the swap execution facility (SEF) landscape. The series comprises SEFs: the Business Landscape, SEFs: the Technology Landscape and SEF Aggregation: Approaches, Pitfalls and Solutions. Best Execution presents a review of these research papers and some of their key findings.
Under Dodd-Frank legislation, the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are responsible for OTC derivatives, demanding trading of swaps on exchanges or SEFs. This regulation is set to improve pre-trade price transparency, post-trade trade transparency and minimise bilateral exposures between swaps counterparties. It has given rise to a number of venues expressing interest in registering to become a SEF, prompting banks and brokers to scramble to determine which of these SEFs will provide them the functionality they need in order to continue to facilitate swap transactions for their clients. Furthermore, both the buyside and sellside will need to ensure connectivity is maintained or new lines are established, in order to retain their access to liquidity, ultimately retaining profitably during this transition. Under MiFID in Europe, multilateral trading facilities (MTFs) and organised trading facilities (OTFs) are expected to converge with SEFs from a regulatory standpoint.
“With competition in the SEFs landscape heating up, we wanted to pull apart all the proposed offerings and establish which venues are
actually going to support the banks and come out strongest.” Bradley Wood, GreySpark Partners
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The business landscape In the first report GreySpark looked at the current and planned landscape in a cleared market, assessing the SEF venues competing to execute cleared swaps and the likely market structure and evolution across asset classes. In all, the report analysed the offerings of 52 potential SEFs, with the focus on the top 12 – based on product coverage, volumes and current market share/ positioning (see table). GreySpark partner Bradley Wood commented:
“With competition in the SEFs landscape heating up, we wanted to pull apart all the proposed offerings and establish which venues are actually going to support the banks and come out strongest. What was really critical in this research was looking at how the influx of SEFs and regulation will change market structure”. The report found that all SEFs will support the
requirement to handle unique product identifiers, unique swap identifiers and legal entity identifiers, rules which are designed to give regulators a better handle on what is happening in the market and that venues will offer the widest possible choice of clearing houses, either directly or through third party platforms. It also found that currently, there are only a handful of true multi-asset providers (see Figure 1), with many leaning towards a single asset class, but this will evolve in the short-term with many SEFs planning to broaden their product offerings.
The technology landscape In part two, GreySpark revealed the technology considerations and challenges for businesses
Best Execution | Autumn 2012
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