February 3, 2014

Game Time

With 17 new swaps execution facilities, 2014 will be the year SEFs breakaway.

By Renee Caruthers

Last year, the over-the-counter swaps market waded its way through regulatory filings to establish an environment that will bring transparency and electronic trading to a market historically dominated by voice trades. With 17 newly minted swaps execution facilities now live, and looming regulatory deadlines that will push more trading to SEFs, 2014 is expected to be the year the industry redesigned by the Dodd-Frank Act begins to really take shape.

As Tabb Group's Will Rhode puts it, with "the year of compliance" behind us, 2014 will be "the year of competition."

New business models are already emerging, as sellside firms, interdealer brokers and a variety of new trading platforms seek to define themselves in an uncharted market. Some sellsiders are already live with new service offerings designed to help clients execute swaps trades on SEFs-service offerings that redefine the role firms will play in executing client orders.

"We have long held the view, based primarily on our initial reading of Dodd-Frank, that there would be a significant number of SEFs and the market would become quite fragmented and complex, so we focused on the question of client access to liquidity," said Paul Hamill, global head of fixed-income agency execution and e-trading at UBS.

As a result, UBS set out to serve as an introductory broker for clients, giving them a single point of access by which to connect to several SEFs. The role has two objectives: By taking on connectivity for clients, the firm enables clients to access markets without having to make additional investments in technology and compliance; and by providing a view of executable prices across several SEFs, the firm can serve as an aggregator of quotes across venues in a fragmented market.

"If you look at other markets, customers do not connect directly to highly regulated markets for the main reason that becoming a direct participant in a highly regulated market is quite involved," Hamill said, noting that there are record-keeping requirements, auditing requirements and financial reporting requirements in addition to the technological investment required to build and maintain connectivity to several venues.

UBS has adapted its Neo trading platform to serve as the entry point to SEFs for clients and has established connections with several of the SEFs already. It has some clients already live, accessing and executing trades on SEFs through Neo.

"It is what many call an agency-type model. We are no longer taking clients only to the UBS price, but instead we are taking them to the best price and that best price might be someone else's. What we are providing is technology, compliance and an operational framework," Hamill said. "Principal trading is still a core part of UBS FI, and this creates an additional service which solved a problem all our derivatives clients face in the new world."

A DIVIDED LANDSCAPE

The landscape of SEFs is often divided into several categories by market observers, with the SEFs that were formerly interdealer brokers, like ICAP and GFI, making up one category and the platforms that were traditionally used for dealer-to-client trades, like Bloomberg and Tradeweb, making up another. Some observers identify a third category for the new entrants to the market who have histories neither as interdealer brokers nor as dealer-to-client platforms.