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Record Volumes on SEFs in September and October

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

USD IRS on SEF Volumes


Lets start with On SEF USD IRS plain vanilla volumes by month in SDRView Res.




Which shows that:

  • September was a record month with more than $1.46 trillion traded

  • In-fact as this volume is capped, from SEFView we know the actual un-capped volume was $1.59 trillion

  • As September is an IMM month, some of this volume is due to future rolls

  • However the same argument can be made for June

  • So in all likelihood this is not a large component of the increase

  • October with only 13 out of 22 days reported, is already at $1.05 trillion

  • So October is on track to exceed September volumes


Swaps Compression


A factor to consider in the volumes is the level of Swaps Compression activity. If you read my blog on Swaps Compression, you will know that trueEX and Tradeweb are the two SEFs that perform the bulk of this SEF activity.


Lets use SEFView to look just at the volumes reported by these.






We know that all the trueEX (SEF) volume is compression, so this figure is $16.75 billion in September.


Tradeweb public reporting unfortunately does not breakout compression from their overall volumes. Anecdotally we know that compression represents between 20% and 30% of their overall volume. So assuming 25%, we get $91 billion.


As we are not aware of other SEF compression activity in September, this gives a grand total of $108 billion or $0.1 trillion.


A small fraction of the $1.59 trillion September volume.


Some folks believe that compression activity should be excluded from trading volumes. However as this activity requires new trades to be executed that offset existing trades and as such a transfer of risk between two parties takes place, I believe they should be included in trade activity volumes. And even if we were to exclude, it does not make a material difference to volume trends.


Very recently we have seen Bloomberg start to offer compression on its SEF and the reported data for 20 October shows the first such trades in SEFView.RecordVolumes-9

USD IRS Off SEF Volumes

 Lets now look at the Off SEF volumes for the same period.




Which shows exactly the same trend as On SEF and comparable record volumes in September and October.


Comparing On SEF and Off SEF for October data.




We see that:

  • On SEF Cleared is 50.4%

  • On SEF Uncleared is 0.1%

  • Off SEF Cleared is 38%

  • Off SEF Uncleared is 11.5%


And breaking these down further, just for the week of Oct 13-17.



We see that:

  • Spot-MAT represent 75.7% of the On SEF Volume

  • Forwards represent 41.6% of the Off SEF volume

  • Non MAT Spot tenors (e.g. 1Y, 8Y, ..) represent 16.9%

  • Non MAT IMM represent 15.4%


Swap Prices

A reason given in the press for higher volumes is the return of market volatility. Using SDRFix we can determine the change in prices that has taken place in October.





Which shows massive moves of down 30 basis points across much of the curve. Plotting daily 11am EST prices from 1 May to 20 October 2014.


Screen Shot 2014-10-21 at 13.11.18





We can see that after trading in the range 1.7 and 1.8 in June and July, there was a spike to 1.9 on July 31, back down into the 1.7 to 1.8 range and then from 9 Sep onwards a large increase in prices and from 1 Oct a large fall.


So clearly much higher price volatility in September and October than earlier months.


Volatility begets volumes and volumes in turn drives volatility.


SEF Market Share


And what of SEF market share in USD IRS Fixed vs Float? Lets use SEFView to show the share in 5Y Swap Equivalent for the months of Sep and October to date.




Which shows that:


  • Bloomberg is the leader with 25% in Sep and 30% in Oct to date.

  • Tradeweb follows with 27% in Sep and 22% in Oct.

  • IGDL next with 15% and 13%

  • Tradition 13% and 16%

  • Tullets 8.5% and 9%

  • Dealerweb 4.8% and 4.8%

  • BGC with 4.9% and 3.9%


So not too different to the chart I produced in June, see the last chart in the Six Month Review blog here. Only changes of note are that Tradition’s share is up 3% and Tullets down 4%.


September was a record month for USD IRS volumes both On SEF and Off SEF. $1.6 trillion of USD Swaps were traded in September.

October is on track to have even higher volumes.

Compression activity represented $108 billion or 6% of total volume in September. Off SEF Cleared Volumes were 38% of the total in October to date.

Forwards were the bulk (42%) of these, followed by Non-MAT Spot tenors and Non-MAT IMM.

Market volatility hit a high for the year with Swap prices dropping 30 basis points in the first 3 weeks of October.

SEF Market Share was similar to June, with Bloomberg leading and Tradeweb next. Slight change in IDBs with IGDL flat, Tradition up, Tullets down.

It will be interesting to see how the remainder of October play outs. And whether the higher volatility and higher volumes continue into November and December.

We live in uncertain times.


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The SEF Landscape – Understanding the Changing Marketplace

Greenwich Associates released a new research report on the U.S. derivatives trading marketplace: The SEF Landscape: Beyond the Numbers. The report discusses market activity and trading behavior, and highlights five key areas market participants should be focusing on in evaluating their approach to SEF trading: liquidity, distribution, unique functionality, pricing and service.

We found these areas to be essential to the understanding of the new electronic derivatives trading landscape, and recently hosted a webcast, “Understanding the SEF Landscape with Greenwich Associates,” which included an overview of the report with Kevin McPartland, Greenwich’s head of market structure and technology, and Michael Furman, managing director and head of U.S. rates sales at Tradeweb.

If you were unable to join us for the webcast, but wish to listen to a recording of it, a replay can be accessed here. In addition, please reach out to our sales team at if you would like a copy of the Greenwich Associates SEF trading report.

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OTC Swaps Clearing Risks Take Center Stage

By Radi Khasawneh
Originally published on TABB Forum

Cross-border regulations aimed at moving bilateral, over-the-counter (OTC) swaps onto exchange-like venues and through central clearing have created additional concerns over the risk that also will move into the heart of a wider market ecosystem. Recent moves in the market, however, underscore the tangible steps that have been made to quantify and manage this risk within the new system.

The International Organization of Securities Commissions (IOSCO) this past week published a paper giving further guidance on recovery plans for what it calls market financial infrastructures – essentially, the central counterparties (CCPs) that clear the new, wider universe of contracts. This issue is important, as the systemic risk now removed from the bilateral world becomes concentrated in the fewer, regulated entities that have the blessing of the regulators.

Meanwhile, clearinghouses, and their Future Commission Merchants (FCMs) intermediaries, have increasingly moved to a more transparent and standardized model now that the smoke has cleared on regulatory implementation. Last week, the CME announced that its clearing operation would start next year charging a new fee schedule for a wider array of fixed income assets posted as collateral starting (as well as paying interest on cash).

This aligns with TABB Group’s view that there is growing consensus among the FCMs in the types of fees they charge. A TABB report published this month, “OTC FCM Business 2014: Momentum Stalls and Challenges Emerge,” concludes that the standard fee structure has moved from straight transaction and maintenance fees to incorporating additional margin requirements for OTC contracts (54% of those FCMs interviewed had adopted some form of this fee). When asked whether they expected major new types of fees to emerge, the majority did not think so.

All of this is positive for market certainty. A key point in the IOSCO report is that the tools used for recovery (essentially, to cover a member default or major loss scenario) should be transparent to all and that the incentives for all should be aligned to reduce unnecessary risk taking. That means a new race to the bottom on fees is unlikely. The major battleground will be the margin benefits and portfolio offsets offered by CCPs and approved by regulators. These can still be a major differentiator among clearinghouses, and the FCMs can and do offer analytics that allow clients to better understand the difference in treatment among firms.

Unfortunately, resources and bandwidth at regulatory bodies tasked with oversight of this process are under pressure. In addition, the original Dodd-Frank implementation teams are starting to move on. Earlier in the week, the CFTC’s Ananda Radhakrishnan decided to move on, to be replaced as director of clearing and risk by Phyllis Dietz. The internal move is a temporary one, but the post will be critical, as cross border agreement deadlines with Europe loom at the end of the year. The temporary relief and coordination with European entities has been a sticking point for the past year, and it can only be hoped that momentum and agreement can help stabilize swaps trading as the new clearing paradigm is effectively extended across the regions.

Ultimately, all of this activity points to a more comfortable and confident market than we have seen for three years. Rules and trading conventions have been established and the push and pull between global regulators and market participants is reaching a more constructive level. The next step will be to ensure that any cross border agreement comes within a framework that is truly equivalent, without moving from a fragmented market to a skewed one.

Timothy Massad, the new chairman of the CFTC, said as much in a speech on Oct. 16, pointing out that a delay in higher capital charges from the European regulators had helped harmonization efforts. “I am pleased that European Commission has decided to postpone the imposition of higher capital charges on European banks participating in our markets,” Massad said. “It was this threat of higher capital charges that was going to fragment the market, not the existence of dual registration, which has actually been the foundation for the growth of the global market.”

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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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