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Swaps and the Flash Crash 15th October 2014

By Chris Barnes, Clarus
Originally published on Clarus Financial Technology blog

Did SEFs Survive the Crash?

Yesterday’s events reminded everyone, everywhere of what trading in ‘08 and ‘09 was like. And yet Swaps trading has changed completely since then. In theory, we should now see continuous trading across SEFs with a degree of liquidity constantly available.

The market conditions yesterday were the first real test of electronic Swap trading since they were Made Available to Trade. In the equity markets, CNBC report that liquidity was bizarrely absent at the opening of the S&P, such that relatively normal sized trades had outsized effects on prices. Meanwhile, Fixed Income markets experienced a “melt-up” in price in reaction to weaker-than-expected Retail Sales numbers. What did we see during the day in Swaps space?


It was a record day for volumes in USD swaps on-SEF (as well as CME Eurodollars), as shown on SDR Researcher:

Screen Shot 2014-10-16 at 15.30.05

Evidently, volumes were far from drying-up! The above chart is based on trade-counts, therefore was all the volume “only” short-end action  – implying that the amount of risk being traded plummeted? If we look at the three sessions between 10th-15th October, we can see this is resolutely not the case:

Volumes and VWAP Oct 15th

The darkest blue bars on the above are for October 15th. On the face of it, the volume and VWAP data represent a relatively normal day, with volumes concentrated in the 5y, 10y and 30y tenors – as we have seen repeatedly in the past. Of particular note is that the VWAP for the 3 sessions is almost identical to the closing price of 10y swaps on the 15th October – therefore it does not appear that any huge trades were printed at the unusual intraday prices we saw throughout the day.


SDRFix highlights just how severe the price moves were yesterday – for example 5 years was over 18bp lower over a 24 hour period:

Screen Shot 2014-10-16 at 15.35.49

The low yields of the day were hit around 09:30 ET (15:30 CET on my price chart below). 5 year swaps traded thus:

5 year Swap prices

The low print was 1.34218 at 09:38 ET- a jump lower of nearly 5bp from the previous print of 1.3912 at 09:34. We then had to wait another 5 minutes for a subsequent trade – at which point yields had popped back up to trade at 1.3855 at 09:43.


What does this tell us about liquidity during this time? If you look at the average size traded in 5 year swaps, it is roughly $35k over the whole of October 15th. In the period from 09:33 to prices stabilising around 09:55, the average size was over $40k – so there is nothing unusual going on with sizes. However, if you look at the evolution of how much traded, there is a clear gap in liquidity provision around 09:33:

Liquidity Evolution Oct 15th ET

Each block on the above charts represents a new trade. There is clearly an absence of trading taking place in 5 year swaps – which is normally the most liquid point along with 10 years. Starting from 09:34 to 09:42 we see no trades in 5 year swaps. If this didn’t also coincide with the huge volatility in prices, then it would typically just be seen as a lull in trading. However, the fact that trading was so active in the minutes afterwards does suggest some kind of liquidity exited the market completely.

I’d love to hear from any of the SEFs regarding this time period. Did they witness a sharp widening in bid/offers across their order books? Was liquidity support really absent for a 5 minute period as prices went crazy? Why did liquidity suddenly come back to the market?

For SEF operators themselves, it is an important point. Market participants need to have confidence that SEFs truly offer continuous trading, even during periods of extreme market stress and volatility. The data from yesterday suggests we are not there yet.

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A Brief History of SEFs – and a Few Predictions

By Tod Skarecky, Clarus
Originally published on Clarus Financial Technology blog

The rise of SEF trading over the past 12-plus months has made for a crazy year. In fact, there hasn’t been a year quite like it in the past 20 years of OTC derivatives. Here’s a look at the major milestones – and a few predictions for the next 12 months.


  • There were only 12 SEFs with paperwork into the CFTC; Bloomberg was the only fully approved SEF, and Tullet Prebon had only just submitted its documents. No sign of Tradition or BGC.


  • By the end of September, there were 19 SEFs with paperwork in. The CFTC gave temporary registration status to 16 of them in September, bringing the total number of registered SEFs up to 17.

  • In my final blog post of the month, I joked about what was more likely: someone trading a swap on a SEF or someone buying Obamacare online?

  • I recall I was due to be in New York on Oct. 2 – go-live day for SEFs – and one of the IDBs had organized a meeting with me for that day. I commented, “Aren’t you going to be busy on SEF Day 1?” The answer was no, hence my forecast at the time for Oct. 2 being a bit dull.


  • Clarus began collecting and aggregating SEF data on that very first day of SEF activity. I commented in my blogs about just how difficult it was to aggregate the data. Every SEF had different formats, some were not publishing the currency of the trades, others quoting in thousands or millions, some reporting in protected PDF format, and on and on. (This led me to write a blog specifically on the topic of proposed SEF reporting standards.)

  • By the end of the month, there were 21 SEFs with applications in to the CFTC.

  • By the middle of the month, the first MAT submissions were in. Javelin was first with its blanket MAT filing for IRS, followed four days later by TrueEx, and then Tradeweb (which added credit); MarketAxess snuck in its paperwork on Oct. 31.

  • The IDB’s, particularly ICAP, had the lion’s share of activity in rates and FX. Bloomberg was reporting the majority of Credit.


  • No-action relief for non-onboarded clients expired on Nov. 1. Funny to look back and think that there were all these clients just dying to use SEFs before they were properly papered and onboarded! The data backed this up, showing only a minor drop in D2C SEF data following the no-action relief expiration.

  • Chairman Gensler spoke at SEFCON in New York, where he pointed fingers at a couple of SEFs for not behaving nicely, in the context of an “All-to-All” marketplace. His guidance on “Impartial Access” meant that barriers such as self-clearing status needed to be removed by the SEFs. Hence the doors for the agency execution folks, such as UBS Neo, were cracked open a notch.


  • Bloomberg got its MAT submission in on Dec. 5, with nothing really added in terms of content.

  • Javelin and TrueEx also modified their original filings. Javelin’s was toned down greatly, based largely on comment letters (to put it nicely).

  • TrueEx reported its first compaction cycle.

  • Lastly, over the course of November through January, the CFTC issued guidance and no-action relief in defining a “US Person” to include US branches of non-US swap dealers.


  • The CFTC had January to provide commentary on the MAT submissions. The October submissions were to be “blessed” by January, with a subsequent one-month lead time until the products being MAT. We pondered what the CFTC could really do (they couldn’t reject them, could they?) and guessed that they would phase in some of the more complex packages.

  • By later in the month, the Javelin submission had been certified for the most active USD and EUR tenors, and the CFTC failed to clarify packages, such that the market was left thinking that technically, “If it’s a required swap, even as part of a package trade, it has to be on SEF.”

  • TeraExchange announced a partnership with European IDBs, which in hindsight has confirmed what we all were thinking – European banks don’t want to trade on a SEF.

  • We at Clarus announced that SEFView, our tool to track and drill into SEF data, was in beta.


  • A week before the Feb. 17 MAT deadline, the CFTC added three months of no-action relief for packaged trades, pushing back the deadline to May 15.

  • SEF activity slowed down dramatically in that same penultimate week.

  • UBS Neo announced it had executed the first IB trade, which happened to be a bunched order done on TrueEX’s SEF that used UBS’s standby clearing to facilitate post-execution allocations.

  • Clarus SEFView went live with our first subscribers.

MARCH 2014

  • Credit Index’s became MAT on the first day of March, and credit volumes began their climb up.

  • Industry headlines shouted about volumes being off by 30%-50%. Clarus and other data showed, however, that while there was indeed a drop-off through the MAT weeks, it came back into line quickly thereafter.

  • For the first time since launch, D2C activity, when looking at vanilla USD and EUR rates and credit, was 50% of the total SEF activity. D2C had accounted for as low as 15%.

  • TeraExchange announces the first Bitcoin derivative. (We are still waiting for the BTC MAT filing:)

APRIL 2014

  • Nothing significant happened in April. We were all too busy contemplating what the CFTC might do about the packages coming due in May.

MAY 2014

  • CFTC announces the phased compliance of package transactions, starting with All-MAT packages on May 16, followed by MAT with OTC non-MAT combos June 2, and spread-over US Treasuries on June 16. The CFTC punted packages of futures and other tricky items into November. Plenty of time to sort that out, right?

  • ICAP launches IGDL, which would start handling all USD, EUR and GBP rate swaps – the idea being that IGDL is dual-registered as both a SEF and an MTF, such that the marketplace has both US and European liquidity. I’m still not sure if the T’s were crossed and I’s were dotted on that, but it is what it is.

  • Bloomberg turns on its SDR, aptly named BSDR. All of its SEF trades (less some non-cleared outliers) start being reported there instead of DTCC.

  • Given all of the package exemptions, I estimated a slow grind up in activity, yet still calculate that no more than 75% of the market would be SEF-able. (I am proven right!)

JUNE 2014

  • The next two package exemptions roll off (MAT/non-MAT and spread-over treasuries).

  • D2C SEF’s continue to show growth. This time, Tradeweb comes in with some big numbers.

  • Clarus adds Eris and CME swap futures to SEFView. Data reinforces that the market has not moved to futures, yet.

  • TeraExchange does its first SEF trade (in USD, not Bitcoin).


  • Volumes remain typical for the summer.


  • Each of the four weeks of September see record highs for SEF activity.

  • BBG introduced CLOB pricing alongside its RFQ mechanism, and we hear stories about some of the IDBs doing 40 percent of their activity electronically. Did it just take a year to get some of this done “e”?


Charting SEF activity, we can make out some of these events described above. Eyeballing the chart below showing all activity spanning IRD, FX and Credit, you can make out the Feb. 17 MAT weeks and the highlights in the month of September.

52 weeks of SEF Activity – ex-FRA and OIS


Looking at the data by asset class, we can see the vast majority is in IRD, which has had some steady growth. FX and Credit, while paling in comparison, have also shown similar growth.

SEF Activity by Asset Class by Week


Here you can readily make out that the growth has been in the client SEFs. Interdealer activity has plateaued.

SEF Activity by Legacy SEF Type


Whittling the data down to just USD Vanilla swaps and their USD Swap Future cousins, we can also see that swap futures have not presented a real threat. Any blips would seem to be the quarterly contract rolls.

USD Vanilla Swaps – OTC & Futures


Crazy year. No other year quite like it in the past 20 years of OTC derivatives. I have a hard time seeing how the next 12 months could trump this one. But here are some predictions anyway.

[Related: “SEF Volumes Will Rise, But Long-Term Pessimism Persists”]

ORDER BOOK: There have been a few press releases over the previous months speaking about the growth in some of the IDB order books. I am a believer that electronic order books will ultimately be the sources of liquidity for the liquid products that comprise 60%-70% of the market. There is just no fundamental reason this wouldn’t be the case. In other asset classes, it took a while, but when it happened, the shift occurred and was permanent. The same will surely happen. Within the next 12 months? I would say yes.

MORE MAT PRODUCTS: So you have come to learn that trading your spot starting swap has to be done on-SEF. This required lots of pain, be it legal, operational or technical; but the investments have been made. Now that we have arrived, you have to ask yourself: Does a four-day forward start swap really mean you have to pick up a phone? Another MAT submission will happen, and it will be justifiable.

MAC & FUTURES: There will always be the bespoke nature of the swaps market. However, I see growth in the standardized MAC contracts as good approximations that yield cost benefits that outweigh the small basis risk. Further, liquidity providers will prefer these products as cheaper to margin and process. The CDS market had a big bang, but I project a slow bang in rates in these standardized contracts. I think that shift will be visible within the next year. The next logical progression is into trading these products as futures. I’m not as bullish on this happening within the next 12 months, but I do see growth in futures within this coming year; however, I do not believe it will constitute more than a handful of percentage points. Yet.

FOCUS ON MARGIN: Over the past year there has been a lot of expenditure by firms on compliance. I see compliance costs taking a turn back toward earth. What’s next is capital. I’ve been shocked to find that firms, both buy-side and sell-side, have been generally oblivious to the costs associated with collateralizing their OTC derivatives with a central counterparty. For some, it’s because they haven’t historically had to pay margin. For others, it’s because their cost of capital has been low in the current low-rate environment. All we need is for rates to inch up, and that suddenly constitutes a doubling or tripling of funding costs for many firms. Desks will quickly be forced to behave smarter about their funding costs, and margin will be of primary importance.

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Collateral Crisis? The Risks in CCPs and Central Clearing

By Miles Reucroft, Thomas Murray
Originally published on TABB Forum

With mandatory central clearing being worked through in Europe, there are, at the time of writing, 13 approved CCPs (central counterparty clearing houses) approved under the European Market Infrastructure Regulation (EMIR). The move to mandatory clearing, while aimed at reducing systemic risk in the markets, will, of course, bring with it a whole host of additional risks.

Risk in CCPs is something that all market participants will need to be very aware of. As competitive entities, each CCP operates differently from the next, so it is crucial for market participants to carefully select, and subsequently monitor, each CCP with which they are involved.

Further down the line, with other European directives such as UCITS V, depositary banks will need to monitor these financial market infrastructures closely, too. The financial world is changing rapidly, and with the change has come a shift in the way risk presents itself.

“One thing that is fashionable to talk about, but I do not think is talked about in the right way, is liquidity risk,” explains Mas Nakachi, CEO of OpenGamma. “Liquidity risk and credit risk are at opposite ends of the spectrum. If you work to reduce credit risk, you actually increase liquidity risk and vice versa. The focus on daily margining is a good thing from a credit risk perspective, but what people do not concentrate on is the impact to liquidity risk of doing that. It is the equivalent of having to pay your credit card bill every hour, rather than at the end of every month. That is the sort of impact we are looking at. What if you could also only pay your credit card bill in £20 notes? That is the sort of constraint you are talking about when only certain types of collateral are eligible.

“You have to measure and monitor calculations a lot more closely on a daily basis,” he continues. “Precision has to be a lot higher than it used to be, as being out by 1% could mean the difference between you being able to pay your credit card bill or not. The risk across credit risk and liquidity risk is under-reported, and people do not seem to realize that the two are related.”

Margin calculations and margin efficiency are areas that OpenGamma is helping its clients with. As such, the conversation turns to the impact of margin requirements at CCPs and the potential for there to be a collateral crunch with the arrival of mandatory central clearing. “I do not see this (a potential collateral crunch) as being the CCPs’ fault; rather, the regulators trying to force everything in one direction,” Nakachi says.

“The CCPs themselves are actually trying to mitigate this, for better or for worse, by expanding the pool of eligible collateral to include securities such as corporate debt. From a liquidity perspective this is good; but again, it impacts the credit side of the equation, as you are expanding into more risky areas that need to have appropriate haircuts applied. You also need to be careful that you do not end up in a situation of market crisis and find that there is not a market for this collateral.”

Liquid, high-quality collateral is a must for CCPs. In the event that a clearing member goes into default, the CCP will need to liquidate their margin quickly and efficiently to make good on its central role as a buyer to every seller and a seller to every buyer.

CCPs, however, are competitive entities. One way of attracting business, obviously, is to accept a wider range of collateral than your competitors, thus opening up your business. “There has been a lot said about the race to the bottom,” says Nakachi of the potential for CCPs to do just this. “It is something that we are currently conducting our own analysis into. What is the reality? There are a number of interesting angles to this, not least discovering what, really, is the cheapest option available to people to margin their trades.

“It’s not up to the clients what they can use in an eligible range of collateral; it is up to the CCPs and their CSA legal agreements that they have with bilateral counterparties. These quantify exactly what can be delivered in certain situations. Within that universe of what can and cannot be delivered is where the optimization occurs. For the smart guys, there is optionality and they can play that. With things like standardization and CSAs, they are trying to narrow that optionality window down so there is no longer any choice and it is what it is.”

The competitive element of CCPs, too, is a risk in itself. “It is one of those very strange questions,” suggests Nakachi. “Some people would say that there are too many CCPs and that, even though it sounds counterintuitive, you would be better off with one CCP where you can net everything. For the dealers, there is a netting piece and there is a governance piece. As there are a lot of CCPs, these challenges add up. Theoretically, the ideal would be to have one or two CCPs globally and that would be it. That, of course, is never going to be the case. Some people view that as a failing of the CCP model.”

To add to the competitive element at CCPs, there is also something of a competition taking place amongst the global regulators responsible for implementing the clearing mandate in response to the 2009 G20 Summit in Pittsburgh where this idea was conceived. “There is no global regulatory harmonization,” asserts Nakachi. “Asia is always going to be different, as is Latin America and Europe. There are all these fractures in the regulatory space where risk can creep in.

“We are introducing all kinds of new risk. This is not necessarily bad, but we need to be aware, from an industry perspective, of the risks in CCPs. For the next few years at least, we are going to be wading through these regulatory changes with a lot of unforeseen consequences.”

The only question that remains is: What next for the CCP space? “There is so much change and so many regulatory pieces that it is very difficult to tell,” says Nakachi. “Finance always has a way, every few years, of blowing itself up. We hope this does not happen with CCPs. Certainly the trading environment will be very different. Some firms will stick to their traditional models while others will get out of the trading space and offer agency services to their clients. Those two camps will be successful and then there will be those in the middle who are neither large nor electronic. They will struggle.”

This has been over recent years, and continues to be, a rapidly changing environment. As such, the risks in CCPs have changed and evolved, too. Be it competition, regulation, margin or liquidity, market participants need to pay very close attention to the CCPs that they use, as well as their own margin calculations.


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More to SEFs Than Just Execution

By Tod Skarecky, Clarus
Originally published on Clarus Financial Technology blog

TrueEx has begun marketing various post-trade services (PTS) to the client community, and it has made me realize there is potentially a lot more to SEFs than just a place to go execute a swap.

What the DCOs Let You Do

Before we look at what SEFs are offering, it is wise to understand what the derivative clearing organizations (DCOs) themselves are offering, as some of the SEF services are really just tools to facilitate services offered by the DCOs.

  • Compression: Cleared trades with matching fixed rates and payment dates can be compressed into a single line item.

  • Coupon Blending: Loosens the requirements of basic compression to allow for trades with any fixed rates to be processed. The DCO will terminate all the trades and replace them with two trades:

    • Fixed/Float swap that has a weighted notional blended rate

    • Fixed/Float, zero coupon swap, with an adjusted notional to balance the projected floating flows.

  • Standby Clearing: A service to clients to clear a single trade and later be allocated

Coupon blending would seem to be particularly helpful for International Money Market (IMM) – but not market agreed coupon (MAC) swaps – such that a firm can buy and sell a standard IMM swap hundreds of times over the course of days and weeks at a 100 different rates, and end up with just two line items.

So What Can SEFs Do?

We all know you can execute a trade on a SEF, be it via CLOB or RFQ. But let’s examine at least some of the items in the TrueEx marketing literature:

  • PTC

  • Bunched Orders

  • Coupon Blending

  • Trade Porting

  • Average Pricing

PTC (Portfolio Termination and Compaction)

TrueEx and Tradeweb offer PTC, and Bloomberg has been vocal about offering this shortly. The idea is that in order for clients to take advantage of the DCO compression services, the DCO requires NEW trades to be created and cleared to either fully or partially terminate the clients pre-existing trades. As such, clients upload a portfolio to the SEF, and the SEF facilitates the RFQ for offsetting trades.

Bunched Orders

If you rewind to the days before clearing, the typical asset management transaction was done as a single trade, and then later on that day, the client would send a spreadsheet to his bank with instructions on how to allocate that trade across the 40 or so separate accounts he was trading for. I recall Markitwire and VCON facilitated this post-trade workflow.

When the days of clearing came in, this had to be re-tooled to expedite the clearing process such that each trade hit its beneficial owner account immediately. What this meant was that trades had to be “pre-allocated” prior to execution so that each trade would be sent for clearing. It’s worth noting that the master trade seems to get reported to the SDR, but the individual allocated legs are cleared.

Enter now the concept of standby clearing, which allows clients to execute the bunched order as a single trade again. For pre-deal credit checking, the client uses an FCM account that has been set up for (presumably) gross credit checking. The master trade gets cleared and held in this account at the DCO until instructions are received to assign it to the multiple accounts, which could also potentially span multiple FCMs.

So where are those instructions managed? Well, this is where SEFs potentially come in. In theory, the client can communicate the allocation schedules to his FCM, which can then communicate them to the DCO for each trade. But if you are a client, you probably have multiple FCMs. and each probably asks you to put it into special formats.

I understand that TrueEx, Bloomberg, and Tradeweb each allow clients (and potentially their FCMs) to perform this allocation operation on their SEF, which in turn communicates with the DCO. The TrueEx offering appears to be agnostic to venue, CCP, voice/electronic, etc., so that, for example, you could execute on Javelin, Bloomberg, Tradeweb, even ICAP, and allocate on the TrueEx PTS platform. This could be interesting if you believe the story that the IDBs are behind in the “client-friendly” bells and whistles on their SEFs, and hence clients need a place to do post-trade operations after execution on one of these venues. Of course, you’d also have to believe that a client is trading on an IDB SEF!

Coupon Blending

Coupon blending should hopefully be clear from a DCO perspective. The DCOs are the counterparty, so they can do whatever they want to trades as long as the risk and flows are equivalent.

What caught my eye is the TrueEx offering “trueBlend” as a one-sided process to reduce line items, along the lines of what the DCO offers. It’s not entirely clear to me how a utility other than a DCO can offer a one-sided coupon blending process, but it seems TrueEx facilitates the STP and reporting of these transactions back into the client’s systems.

Trade Porting

Trade porting also caught my eye. TrueEX market this as a utility to “move existing positions between clearing houses and between clearing firms.”

Back in 2009 when I first began working with clearing houses, we designed a solution for doing just this – taking a cleared leg of a trade and moving it to another clearing house. The logistics are possible, but the fundamental problem is always that the clearing house needs to maintain a zero risk position, so you can’t ever take away a single leg of a trade.

Moving a trade to another clearing house (without executing more trades) requires de-clearing it. To do this and maintain a zero risk position at the CCP, you need to also de-clear an equal and opposite trade. While it is theoretically possible to go find the other side (original counterparty to your trade), clearing houses just aren’t keen to perform this service (of course!). Further, as clearing houses have begun to do single-sided compression such as coupon blending, there is no guarantee any longer that there is an equal and opposite trade for every trade they have on the books.

So the only way I see “moving between clearing houses” is through the execution of LCH/CME basis trades, which will compress the original trade at one of the DCOs.

Average Pricing

While I don’t see this offered on the TrueEX datasheet, I do occasionally hear of firms wanting to do a series of trades and have them allocated at an average price. In a simple example, if they are receivers of 10mm @ 3.0% and 10mm @ 3.5%, their average rate is, of course, 3.25%. However, if they need to allocate equally to four accounts at the average price, how do you do that?

The answer seems pretty simple: Perform a type of coupon blending on the original package (of two trades) and create four equal trades in each account. Of course, coupon blending creates two trades per account (hence eight total), but this is just some of the gory detail that clients want addressed.

Maybe TrueEx is operationally solving this in TrueBlend.


So what does this have to do with SEF volumes? Well, I found it interesting that there is roughly $80 bn of activity for TrueEX year-to-date, according to the TrueEX data sheet. But a whopping $3 trillion from its PTS platform.

So there seems to be lots of appetite for these client-friendly bells and whistles that are happening away from the SEF itself.

The chart below shows SEF volumes. If we were able to collect all post-trade service activity (which would be double-counting, in many cases), the amounts seemingly would be much larger.

Year-to-Date SEF Activity for Legacy “Client” SEFs


Once you get away from the interdealer trading activity, you realize clients require quite a bit of special treatment in the pre- and post-execution arena. There are DCO services available for these clients, and it would seem that the SEFs have begun to cater for these services, regardless of whether that trade was executed on their SEF or not.

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SEF Volumes Will Rise, But Long-Term Pessimism Persists

By Colby Jenkins, TABB Group
Originally published on TABB Forum

SEFs went live last October, and swaps trading hasn’t been the same since. After months of speculation and anxiety, the initial round of Made-Available-to-Trade (MAT) determinations came into effect in February, and for certain swap contracts, SEF trading stopped being an option and became a legal obligation. These mandates have been a catalyst for growth in the SEF market, and six months later we are starting to see certain SEFs breaking away from the pack, although discontent still remains high among participants.

Market participants aren’t completely sold on the new regime. Despite a steady rise in volumes since optional trading first began in October last year, two-thirds of respondents to a TABB Group study expressed that they are more willing to do more business via swap alternatives such as swaps futures as a direct result of SEF rule implementation (see Exhibit 1, below). In addition, a series of customer-facing SEFs allowing both electronic request for quote (RFQ) and order book trading have come on-line, and they are gradually gaining market share, as TABB predicted at the start of this year. Voice RFQ, which closely aligns with pre-existing swaps workflow, was allowed for in the final SEF rules published last year. 

Exhibit 1: Now that SEF rules are implemented, are you more inclined to do business via swap alternatives?

Source: TABB Group

In terms of overall market share, the prevailing execution protocol remains dealer-driven RFQ. The issue from the beginning has been whether these interdealer SEFs could attract buy-side flow as MAT mandates forced swap participants onto SEF platforms. What we have seen since these mandates came into effect in February is a steady migration of notional volume onto newer dealer-to-client (D2C) SEFs, which offer more standardized, exchange-like protocols. While these client-facing SEFs may have captured less than 8% of notional flow for rates in the first few months, today that figure is upward of 35%. This flow also indicates an appetite for less traditional swaps trading protocols, such as electronic RFQ and Central Limit Order Books (CLOBs), reflective of the fact that survey participants anticipated that by 2015, 40% of the market will be traded via electronic RFQ, 31% via CLOB, and less than 25% via voice RFQ.

Nevertheless, it must be said that volumes across the board haven’t exactly been up to expectation so far. Of the 135 participants surveyed in TABB’s SEF Industry Barometer 2014, more than half felt that the notional size of the swap market would shrink within the next few years. Meanwhile, the reason behind less-than-stellar SEF volumes to date was not unanimous among survey participants: 61% believed that more non-standardized swaps were being utilized as a means to bypass execution mandates and remain off-SEF, and 45% believed swaps users had forgone previous levels of trading due to the cumbersome economics of clearing and SEF trading (Exhibit 2).

Exhibit 2: Where Has SEF Volume Gone?

Source: TABB Group

The last TABB Group SEF Industry Barometer, published in July 2013, outlined the implications of newly finalized SEF rules and the Industry’s vision for the future of SEF trading and the OTC market as a whole. Our 2011 report focused on the industry’s stance on some initial key issues that still are being debated today. This is TABB Group's fourth SEF Industry Barometer and we have incorporated the relevant results from each study to show the steady increase of pessimism about the prospect for future growth.

But there have been positive surprises. The emergence of SEF aggregation and intermediation may help reduce initial barriers to entry, and the limited MAT self-certifications have helped increase certainty. International regulatory cooperation may help bring some market participants back to the table. On-SEF trading can only grow in importance, but the market still looks very crowded. The expansion of alternative trading protocols and a wider array of SEFs truly challenging for market share is an important first step on the road to a functioning market.

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Compression 101: How a Humble Efficiency Tool Became a Major Factor in SEF Trading

Published September 30, 2014

Compression has become a topic du jour for the financial technology trade press. Wall Street & Technology recently reported that compression-style trades have “skyrocketed,” while GlobalCapital inked a headline citing “compression usage spikes,” and Markets Media reported that “swap compressions hit $500 trillion.” Clearly, there’s a trend here.

But what is compression, really? Until recently, this relatively benign method of back-office number-crunching was an efficiency tool that market participants would use to reduce the number of trades that were sitting on their books at the clearinghouse. As the clearing mandate under the Dodd- Frank Act has taken effect, compression is becoming an important part of derivatives trading on Swap Execution Facilities (SEFs).

Despite its newfound popularity, many people still wrestle with the definition of compression and its cousin compaction. To help get a handle on the basics, Tradeweb Markets developed a Q&A to explain the tool that is becoming more and more a part of the derivatives trading process.  To access the full article, click here.

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Regulatory Uncertainty Still Dominates Swaps

By Sol Steinberg, OTC Partners
Originally published on TABB Forum

Regulators continue to struggle to revamp the OTC swaps space, leaving the industry uncertain of the final rules. Here’s perspective on some of the top stories shaping the industry outlook.

Regulations remain top concerns in the OTC space as regulators wrestle with issues such as cross-border recognition of clearinghouses, margining requirements for uncleared swaps, and whether requiring banks to separate certain swaps trading functions from banking operations will help reduce risk. The ongoing debate on various regulatory issues underscores how many of the regulations that will govern OTC swaps still remain unresolved.

The unfinished regulatory landscape is one reason for the continued interest in swaps trading volumes. It has been hard to chart a clear picture of the size of the industry post-Dodd-Frank. Conflicting reports from dealers that have either cut or grown their derivatives holdings, and irregular volumes from swaps trading facilities indicate the post-regulatory OTC swaps market is still taking shape.

SEF volumes rising from summer months.

Interest rate swaps trading volumes on swaps execution facilities (SEFs) dipped during July and August, according to TABB Group. But at least one major SEF indicates that the summer lull may be over. Over the summer, total notional volume traded on-SEF for cleared interest rate swaps dropped 26 percent, from $2.67 trillion in June to $1.98 trillion in August, according to TABB analyst Colby Jenkins.

Meanwhile, Tradeweb indicates that the month of September started strong. More than 110 institutional derivatives trading clients executed more than $230 billion of global interest swaps on its request-based SEF in the first two weeks of September. Tradeweb’s September figures represent a 20-fold increase from October of last year, the company says.

Massad is hopeful that dual recognition of clearinghouses with the EU will win approval.

Commodity Futures Trading Commission chairman Tim Massad says the agency is nearing an agreement with European regulators on the issue of cross-border recognition of clearinghouses. The CFTC is finalizing the steps for an “equivalent system” for recognition of swaps clearinghouses in Europe, Massad said during his opening statement for the first CFTC open meeting since he took office. These are the final legal steps necessary for European recognition of US clearinghouses under the “dual registration” structure. If the U.S. is not granted equivalence by Dec. 15, European banks that are members of U.S. clearinghouses will be subject to much higher capital requirements, which may cause some of them to pull back from U.S. markets.

The CFTC approved two rules at its September open meeting, one related to hedging for small utilities and another related to margin requirements for uncleared swaps. The first rule allowed small and government-owned utilities to transact swaps and other hedging transactions with counterparties who might not be registered dealers. This was to allow them to hedge energy prices without unduly burdening their businesses. The agency also passed a rule requiring swaps dealers and major swaps participants to post and collect margin in bilateral swaps trades they engage in with each other that aren’t centrally cleared.

Judge dismisses cross-border rules suit filed against CFTC by SIFMA and others .

U.S. District Court Judge Paul Friedman last week dismissed a lawsuit challenging the CFTC’s cross-border guidance. While dismissing the case, Judge Friedman ordered the CFTC to assess and provide a reasoned explanation of the costs and benefits of its cross-border swaps dealer registration requirements, record-keeping rules and other cross-border regulations. Judge Friedman said the CFTC’s errors were of form, not substance.

The suit had been filed in December by the Securities Industry and Financial Markets Association (SIFA), the International Swaps and Derivatives Association (ISDA) and the Institute of International Bankers (IIB). CFTC Chairman Tim Massad praised the ruling, saying it “rejected a sweeping injunction of the rules that are at the heart of Dodd-Frank’s overhaul of the swaps markets.”

Citigroup outpaces rivals in growth of derivatives.

Citigroup has grown its derivatives holdings by 69 percent over the past five years, Bloomberg News is reporting. At the end of June, Citigroup had $62 trillion of open derivatives contracts, up from $37 trillion in June 2009. The growth of derivatives instruments that the government has tried to regulate and reign in since the financial crisis puts Citigroup on a different track compared to its rivals. During that same period, JPMorgan trimmed derivatives programs 14 percent, to $68 trillion; Goldman Sachs grew its holdings by 13 percent, to $58 million; and in aggregate the top 25 firms with the largest derivatives holdings reduced the gross notional value of their contracts to $297 trillion at the end of March, from a peak of $333 trillion in mid-2011. Most of the Citigroup’s derivatives are in interest-rate swaps, and it has amassed the largest stockpile of interest rate swaps.  Bank officials say that the growth is due to client demand.

Regulators may delay until mid-2016 rules requiring banks to separate swaps unit

Banks may win another year-long delay to the deadline by which they must separate some of their swaps trading out of the banks. The Dodd-Frank Act requires banks to move certain equity, commodity and non-cleared swaps outside of bank units that have deposit insurance and access to the Federal Reserve’s discount window. The deadline, currently set for July 2015, may be pushed back to July 2016.

The rule originally applied to more types of derivatives, including interest rate swaps, but was scaled back so that the large interest rate swaps market no longer has to be separated out. Banks emjoy huge cost and margin advantages by keeping the swaps trading in the bank, but regulators in favor or the rule believe separating out these functions will make banks safer.  

More perspective on Alibaba’s IPO

When Alibaba’s stock opened at $92.70 per share, putting its market cap at more than $228 billion, it officially became the largest IPO in US stock market history. FactSet’s John Butters put it in more perspective: “Based on yesterday’s closing prices for the companies in the S&P 500, Alibaba would be one of the largest 15 companies in the S&P 500 by market capitalization,” he said. “It would rank 12 in the index overall, ahead of companies in more ‘traditional’ industries such as Pfizer ($193.9 billion), IBM ($193.3 billion), and Coca-Cola ($183.3 billion).”

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USD MAC Swaps: How Large Is the Market?

By Amir Khwaja, Clarus
Originally published on Clarus Financial Technology blog

In my recent blog, USD MAC Swaps: A Closer Look, I noted that once the September roll into the December contract was complete, the cumulative volume of this would provide an interesting in-sight into how large the USD MAC Swap market really is. In this article, I will look to establish this.

Charts of Trade Counts

Assuming that firms start rolling up to 10 days prior to the September 17, 2014 date, lets start by using SDRView Res to look at weekly volumes for the 3 week period leading up to this date.

First 1-5 Sep:


Which shows that:

  • 205 MAC trades out of 4,025 On SEF USD Swaps, so 5%
  • 185 MAC trades were Off SEF, out of 2,447 USD Swaps
  • Of which 24 were Cleared and 161 Uncleared

Then 8-12 Sep:


Which shows that:

  • 482 MAC trades out of 4,654 On SEF USD Swaps, so 10%
  • 1,578 MAC trades were Off SEF, out of 5,946 USD Swaps
  • Of which 1,494 where UnCleared!
  • (Drill-down on these shows a large number of small notional trades, $1m, $2m, $3m, $4m, …)
  • The 482 On SEF MAC Trades are > $48 billion gross notional out of > $379 billion for On SEF USD Swaps

Then 15-19 Sep:


Which shows that:

  • 237 MAC trades out of 4,626 On SEF USD Swaps, so 5%
  • These represent $15b gross notional out of $338 billion
  • 99 MAC trades were Off SEF, out of 3,574 USD Swaps


Given the above we can see that the week of Sep 8-12 has much higher volume and is when most of the Sep to Dec rolls must have taken place.


How Much Volume Rolled?

To establish this we need to turn to SEFView, where we know that Tradeweb and Bloomberg are the two SEFs that report MAC volume.

Lets start with Tradeweb, export the drill-down data and process in Excel to isolate MAC Swaps.


Which shows that in the week of 8-12 Sep:

  • $162.8 billion gross notional was reported by Tradeweb
  • Of which $76 billion was MAC Swaps
  • Sep 2014 delivery trades were $37.4 billion
  • Dec 2014 delivery trades were $37.7 billion

Over the 3 week period a cumulative $47 billion of the Sep delivery month were traded and presumably all or at least the vast majority of this volume rolled into the Dec delivery month, where we see $50 billion of gross notional. Assuming that the MAC market is similar to IMM Swaps or Futures, in both of which the bulk of the outstanding volume is in the first delivery month, we would say that the outstanding notional of USD MAC Swaps is at least $50 billion.

Lets now look at the BSEF numbers.


Which shows that in the week of 8-12 Sep:

  • $120.9 billion gross notional was reported by BSEF
  • Of which $29 billion was MAC Swaps
  • Sep 2014 delivery trades were $11.3 billion
  • Dec 2014 delivery trades were $17.6 billion

Over the 3 week period a cumulative $11 billion of the Sep delivery was traded and $31 billion of December.

What does this say about total outstanding MAC volume?

Well we could add $11b to $47b and say that Sep delivery shows $58 billion was traded. Or we could use the Dec delivery figures of $31b and $50b to come up with $81 billion.

Lets go with the $80 billion estimate.

Does not sound huge, but would be interesting to compare this with IMM Swaps.

For me that is work for another day, but if you are interested please do for yourself using SDRView Res or SEFView.

It would also be interesting to compare with Swap Futures, both ERIS and CME.

That is also work for another day, unless someone reading this has the information and would like to share. (Please send to me and i will update the article or add a comment).


Other Points of Interest

Tradeweb reports MAC Swaps that are CME Cleared separate to LCH Cleared ones. This shows that only $5.3 billion out of the $98 billion reported was on LCH. So the vast majority of the outstanding volume and trading of MAC Swaps is CME Cleared.

5Y is the highest volume tenor with around $14 billion rolling from Sep to Dec on Tradeweb in the week of 8-12 Sep.

2Y, 7Y, 10Y, 15Y, 30Y have volume in the range of $3 billion to $6billion rolling.



MAC Swaps for the first two delivery months are MAT.

The Sep to Dec roll provides a good opportunity to observe the cumulative volume for each delivery month.

Assuming the majority of the outstanding volume is the front contract, we can use this to estimate the size of the USD MAC Market.

SDRView aggregates MAC trades, but the volume is capped for block trades.

SEFView shows us that Tradeweb and BSEF have the majority of the volume in MAC Swaps.

The majority of roll activity took place on Tradeweb in the week of Sep 8-12.

Using this we estimate the size of the USD MAC Swap market as around $80 billion of outstanding notional.

While this is small it would be interesting to compare this with IMM Swaps or Swap Futures.

It will be even more interesting in to look at the Dec to Mar roll (or indeed the previous Jun/Sep one) and see how the volumes change.

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SEFs Look to Rebound from Summer Doldrums

By Colby Jenkins, TABB Group
Originally published on TABB Forum

Total notional volume traded on-SEF for cleared Interest Rate Swaps dropped for the second consecutive month in August. But early September activity indicates a rebound may be coming.

Despite early summer optimism fueled by record-breaking SEF volumes in June, it would seem the notorious summer doldrums have finally put a damper on the ever-growing momentum of SEF trading.

Total notional volume traded on-SEF for cleared Interest Rate Swaps dropped to $1.98 trillion in August. This marks the second consecutive month of decreasing SEF activity and the second-lowest on-SEF volume in the post-Made Available to Trade (MAT) trading environment (see Exhibit 1, below).

The August drop is even more pronounced when volumes are isolated for G3 currencies. Average notional traded per day dropped 27% from the 2014 high, to just over $86 billion – the second lowest notional average since MAT determinations came into effect.

Despite these recent drops in activity, however, SEF volumes have nonetheless been steadily on the rise since MAT determinations came into effect last February. June was a record-setting month for SEF trading of rates. Notional volumes traded on-SEF nearly hit $2.5 trillion for the month (an all-time record), Dealer-to-Dealer (D2D) SEFs were announcing record volumes on electronic central limit order book platforms, and client-facing SEFs (D2C) in aggregate captured 30% of total SEF trades – up from 8% in early 2014.

Looking to individual SEF volumes, the recent outflow in rates SEF activity is not concentrated among a handful of major firms; rather, it is a relatively consistent trend across all SEFs for the past four months. In terms of month-on-month growth, Dealer-to-Customer (D2C) SEFs have slightly outperformed D2D platforms (see Exhibit 2, below); however, in terms of pure notional market share, interdealer SEFs continue to capture nearly double the notional volume traded via D2C SEFs.

While D2D SEFs may currently be enjoying double the flow that their D2C counterparts currently capture, the activity that these incumbent D2D SEFs capture is, for the most part, pre-existing flow, and each month the percentage going to D2C SEFs increases steadily. This poses a significant challenge for the current IDBs’ business models, and as a result, we expect to see a certain amount of consolidation among SEFs to get an edge in capturing adequate liquidity.

In fact, we may finally be seeing the first steps of this trend of consolidation. Earlier last week, the Wall Street Journal reported that BGC Partners, which operates one of eight D2D SEFs in rates, has submitted a $675 million bid to purchase rival GFI Group. Should this deal go through, the combined market share captured by these consolidated D2D SEFs would put them in a breakaway lead position among D2D SEFs across rates, credit, and FX, and second only to Bloomberg in terms of total notional volume traded via SEF.

In TABB Group’s fourth installment of the SEF Industry Barometer, which was published last week, we asked participants why they felt SEF volumes have not been up to expectation, and the unanimous answer was that trading had shifted to non-standard (off-SEF) tradable swaps. It is, however, far too early to consider these figures as evidence of participants easing away from SEF activity when off-SEF figures reflect a similar drop month-on-month.

What is far more likely is that what we are seeing here is a straight-forward case of the summer doldrums. Early on- and off-SEF September activity supports this interpretation, given that in the first two weeks of the month daily notional traded on-SEF jumped more than 10%, while off-SEF activity remains consistently low. We expect that over the remainder of the month, as traders return to their desks and participants begin to gear-up for the final set of package trade expiry, the month-end figures for September and October should match, if not exceed, early summer levels.


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Breaking Collateral Bottlenecks

By Mark Jennis, DTCC
Originally published on TABB Forum

The success of the G20 agreement finalized in Sept. 2009 to enhance transparency and increase market stability while reducing counterparty, operational and liquidity risk will be largely dependent on the efficient management and effective allocation of collateral. The industry’s ability to meet this challenge, however, rests on cross-border collaboration and the development of holistic, industry-wide solutions.

Collateral has always been crucial to the efficient functioning of funding and capital markets and, in turn, essential for economic growth. Prompted by the G20’s reform agenda, however, the introduction of central clearing and increased margin requirements for non-centrally cleared derivatives has put a strain on the ability of market participants to manage their collateral processes, largely due to a combination of outdated and siloed collateral management systems and collateral fragmentation.

In fact, a recent academic study published in June 2014 by the London School of Economics (LSE) highlighted the increasing occurrence of collateral bottlenecks due to weaknesses in financial market infrastructure. These weaknesses lead to eligible collateral becoming immobilized in one part of the system and unattainable by credit-worthy borrowers that need access to their inventory of collateral for central clearing purposes and increased margin requirements for bilateral transactions. Additionally, such borrowers also need to track and optimize their available collateral, including assets held at other banks and custodians, to fulfil their investment and trading strategies. In today’s marketplace, the ability to successfully analyze the collateral implications of a trade before it is executed is paramount and enables more efficient management of the available assets.

Firms, having fully grasped their collateral obligations, are becoming increasingly concerned about their ability to comply with new regulations governing the use of derivatives, including Dodd-Frank and the European Market Infrastructure Regulation (EMIR). They now have a heightened level of awareness of the need to review their processes to account for new margin and collateral requirements for both cleared and non-cleared derivatives transactions, which will bring efficiency to their collateral management processes, enabling them to remain competitive and drive down costs. This has been made even more important now that assessments of available collateral have to be made in real time for transactions that are centrally cleared.

A large number of firms, however, are still using outdated processes and fragmented systems to manage their collateral. Indeed, too often, collateral is managed in silos across an organization – both geographic silos and across business lines. This makes it almost impossible to have a holistic view of what securities are in use and where securities collateral is at any given time. The net result: a sub-optimal collateral processing environment that is costly and by definition an environment that does not maximize the collateral possibilities of the firm’s entire portfolio.

There are currently a plethora of automated collateral management solutions encompassing everything from portfolio margining to collateral optimization, all attempting to address the different components of the collateral challenge. However, the sell side, buy side, central securities depositories (CSDs) and custodians alike all recognize that these fragmented solutions only address parts of the problem.

For firms that use fragmented and legacy systems, it is essential that they review their processes to ensure they can manage workflow changes – in many cases, legacy systems will no longer be flexible enough to adapt to the new regulatory requirements. Firms should therefore consider the impact of using these types of systems from an investment, trading and operations perspective. Perhaps an alternative would be to instead look at holistic solutions and offerings that can address these problems and help ensure compliance with collateral and clearing requirements worldwide.

Second, while reviewing processes and implementing collateral management solutions at an individual firm level is crucial, collateral mobility needs to be addressed at an industry-wide level. Given that its supply is finite, collateral must be able to move smoothly and efficiently throughout the financial markets – a collateral bottleneck in one part of the system can have a knock-on effect across the markets and risk choking the global flow of liquidity. Just as individual car owners do not control the traffic light system for the safe movement of traffic and reduction of congestion, nor can derivatives users be expected to manage global collateral mobility.  

Recognizing that the industry requires a solution to address both the scale and efficiency of the collateral management challenge, DTCC has been working on a key initiative, by leveraging infrastructure enhanced through a partnership with Euroclear. The joint venture will create a global Collateral Management Utility (CMU) that will follow the development of a Margin Transit Utility (MTU). [Note: Certain aspects of the MTU and CMU are subject to regulatory approval.]

The MTU, which is in advanced stages of development, will leverage DTCC-developed infrastructure, and will offer straight-through-processing possibilities for margin obligations. Using electronic margin calls between market participants, the MTU will utilize Omgeo’s ALERT database to enrich the agreed margin calls with the standing settlement instructions for cash and securities transfers and pledges, and then automatically generate and send the appropriate delivery/receipt, segregation and/or safekeeping instructions to the applicable depositories and/or custodians. The service culminates with the investment managers, Futures Commission Merchants (FCMs), and General Clearing Members (GCMs), dealers, and clearinghouses receiving electronic settlement status and record-keeping reports for all collateral movements. 

This facility will mitigate systemic risk and provide significant additional risk and cost benefits to both sell-side and buy-side market participants by increasing scalability and operating efficiency, and providing greater transparency across collateral activity. Longer term, the solution will connect collateral data with information reported to the DTCC Global Trade Repository (GTR), providing a complete view of risk exposures in the event of a future market crisis.

As envisioned, the CMU will harness the open architecture of Euroclear’s Collateral Highway and enable users on both sides of the Atlantic to consolidate assets under a single inventory and collateral management system. This provides them the possibility to optimally allocate mutualized assets to meet exposure obligations in both the European and North American time zones. Collateral processing is done across a single virtual pool even though the assets remain on the books of each depository, with each opening accounts in the other depository. Collateral allocations will seamlessly integrate with other settlement obligations at the relevant depository, significantly reducing the risk of blockages and settlement failures during market stress conditions.

The CMU will address the pressing problem of accessing collateral globally and automatically coordinate collateral settlements and substitutions with other settlement activity. Market participants often cite sub-optimal collateral mobility, allocation and settlement coordination as issues at a global level, and the CMU will fill this gap.

While the new derivatives trading and clearing environment will benefit the market and increase investor confidence in the long term, in the short term, firms must be equipped to adapt to these changes. The key to doing so is for market participants to understand their impact and to be able to prepare by implementing holistic and community-based infrastructure solutions. To that end, DTCC is continuing to collaborate with industry partners to develop solutions that address the operational challenges and risks associated with the increased demand for collateral. 

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