Icap Updates on Early SEF Activity

Terry Flanagan

Icap said it’s handling about 40% of interest rate swap volume on the swap execution facilities that launched this month and the inter-dealer broker has hired a CEO for its US SEF to expand the business.

“We thought that incumbents would benefit in the early days of SEFs and we have had solid support from our customer base,” Chris Ferreri, managing director at ICAP North America told Markets Media.

Since the financial crisis regulators have been pushing for derivatives to move from trading over-the-counter market to exchanges where they can be centrally cleared. As called for under the Dodd-Frank financial reform act, some SEFs launched about a month ago, but the Commodity Futures Trading Commission pushed back to Nov. 1 its deadline to comply with certain requirements.

Niamh Alexander, an analyst at KBW, estimated in a report on October 24 that Icap was trading a daily average of $54bn of interest rate swaps on its SEF, a 38% market share, with Tullet Prebon next with 25%.

“We think this is dealer-to-dealer-volume that was previously executed electronically and has now migrated over to SEF trading,” Alexander added. “There are few alternatives for the inter-dealer market, which is why we think IDBs have dominated rates so far.”

In contrast to swaps, KBW estimated that Bloomberg has taken about 78% of credit derivatives trading on SEFs.

Chris Turner, an analyst at Goldman Sachs, said in a report last week that cross-referencing SEF volumes with data from the Bank of International Settlements implies that approximately 17% of OTC interest rate derivative volumes have been conducted on SEFs since their launch. “We believe these early volume trends are best viewed as an opening skirmish in what has the potential to be a period of significant flux in market shares,” Turner added.

Ferreri said SEF trading will increase as regulators require banks to retain more capital and with reduced balance sheets they are likely focus their resources on key clients. “Dodd-Frank requires that SEFs must provide impartial access and this could present an opportunity to provide liquidity to firms that may seek liquidity from the SEFs,” he added.

The use of SEFs is optional until February next year, when buy side firms are expected to connect. New pre-trade SEF credit hubs that check and approve credit and clearing for counterparties are also expected to launch before the February deadline.

“Overall SEF trading volumes on central order books are likely to increase once the credit hubs are up and running. This may bring in additional buyside activity onto the SEFs. It’s difficult to predict trading activity as it hinges on so many factors,” said Ferreri.

Last week Icap said it hired Laurent Paulhac as chief executive of CEO of Icap SEF (US), reporting to Michael Spencer, group chief executive officer. “He has an impressive record in financial services, has great experience in clearing and is aware of the many differences between futures exchanges and SEFs,” Ferreri said.

Paulhac was previously senior managing director for interest rate and OTC products and services at the CME Group, responsible for the exchange’s interest rate and OTC strategies. Based in New York, Paulhac will be responsible for leading ICAP’s global SEF initiative and managing i-Swap, an electronic trading platform for OTC interest rate derivatives in the US.

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