Not All SEFs Are Equal

Terry Flanagan

Comparing volumes at swap execution facilities is tricky because reported volumes can vary greatly depending on the type of SEF, the time of year, and the types of swaps being executed.

One significant change over the last few months is that some SEFs have seen great increases in usage of compression, which are a way for end users to execute large packages of risk neutral transactions in bulk.

“What that does is create more variability in SEF volumes, because a customer that may not have compressed their swap book over the last three months may do everything in one day,” a product strategist at one of the SEFs told Markets Media. “Even though there is really no risk attached to it, you’ll see that SEF where the customer did that package have a huge uptick in volume for that day.”

Because of that, the aberrations in SEF volumes have increased among the three platforms that have compression — Tradeweb, TruEx and Bloomberg. “If one of those SEFs has a large compression trade that day, you may see volume that’s outsized,” said the product strategist.

Another variability is the use of forward-rate agreements, which are short instruments between one, three and six months, that determine the rate of interest to be paid or received on an obligation beginning at a future start date. The contract will determine the rates to be used along with the termination date and notional value.

Because FRAs are actually byproducts of most interest rate swaps, they tend to inflate notional SEF volumes, making comparison between SEFs difficult. Two SEFs that concentrate on dealer-to-customer trading — Bloomberg and Tradeweb — had a combined share of 31.9% of non-FRA trading during the week of Oct. 13, the highest level yet recorded, according to FIA SEF Tracker. Tullett Prebon captured 22.7% of non-FRA trading in the last week of October, the highest for that SEF since July. ICAP ranked second, with 20.3% of the market across its two SEFs.

Market-agreed coupon (MAC) swaps, which are standardized instruments, are another source of variability because they have quarterly expiration dates. As a quarterly expiration approaches, users will roll their positions over to the next quarter, resulting in a large increase in dealer-to-customer SEF volumes.

During the week of the October roll, market share was distributed more evenly than typical. Bloomberg’s market share dropped to 65.3% during the week of Oct. 6, the lowest level since May, according to SEF Tracker. Tradeweb’s market share rose to 17.6% and MarketAxess’ market share rose to 5.0%, the highest ever for both SEFs. By month end, volume had dropped to $175 billion and Bloomberg’s market share had risen back to 74.9%.

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