02.27.2013
By Terry Flanagan

CDS Index Liquidity Deepens With Inter-Dealer Trading

Liquidity in the market for European credit default swap (CDS) indices is deepening and the market is becoming more transparent due to inter-dealer trading platforms.

Tradeweb Markets, the electronic marketplace operator, has planted its inter-dealer business Dealerweb in Europe for the first time, and in the process has enhanced its electronic iTraxx CDS index platform in Europe, enabling both sell-side and buy-side clients to access the same bids and offers from liquidity-providing dealers.

This addition of inter-dealer trading alongside dealer-to-institutional client trading is designed to improve transparency and promote more liquid markets for all participants.

Enrico Bruni, Tradeweb Markets

Enrico Bruni, Tradeweb Markets

“The markets are of a similar size, but in recent years there has been much more volatility in the European CDS market due to political uncertainty and the sovereign crisis in Europe,” said Enrico Bruni, managing director and head of Europe and Asian business at Tradeweb Markets. “This can mean that trading activity and therefore intraday price moves are more pronounced in iTraxx indices.”

Trading of CDS indices is unique in that electronic trading has penetrated the dealer-to-client space far faster than it has in the inter-dealer space.

“Dealers have historically been focused on providing liquidity to institutional clients and so e-trading in the dealer-to-client segment has gained traction more quickly,” said Bruni. “Now liquidity providers are seeking an electronic trading model that better suits the differing requirements of the inter-dealer market.”

By introducing both a streamed trading environment and Dealerweb’s order book functionality to the inter-dealer market in Europe, Tradeweb says that it is better addressing the needs of this segment. “This has been borne out by the significant increase in trading volumes that we’ve seen,” said Bruni.

The step-up in electronic trading comes at a time of momentous change in the OTC markets, as regulators seek to move the bilateral swaps market on to exchange-like platforms, known as swap execution facilities in the U.S., which compete directly with futures exchanges, which have also developed their own swap futures products that are the economic equivalent of swaps.

“Efforts to move segments of the swaps market to futures is not a new idea, and is not a construct from the Dodd-Frank legislation,” said George Harrington, global head of fixed income trading at financial data provider Bloomberg, at a Commodity Futures Trading Commission (CFTC) roundtable earlier this month.

“Over the past decade, there have been multiple attempts by exchanges to launch futures contracts based on swaps, none of which have developed significant liquidity to become viable,” he said.

ICE Clear Credit LLC, a U.S.-based clearing house for CDSs, has begun offering customer clearing of the iTraxx CDS indices that are subject to the clearing requirements under the Commodity Exchange Act.

In accordance with the timeframe previously set forth by the CFTC in a final rulemaking in December, the following compliance dates apply to the clearing of iTraxx swaps: category one entities by April 26; category two entities by July 25; and all other entities by October 23.

Under the compliance schedule for required clearing, category one entities are swap dealers, security-based swap dealers, major swap participants, major security-based swap participants and active funds. Category two entities are commodity pools, private funds other than active funds, and persons predominantly engaged in activities that are in the business of banking.

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