OTC Swap Market Structure in Nascent State

Terry Flanagan

An embryonic market structure for OTC derivatives trading is forming, with swap execution facilities and exchanges at the center. As swap trading activities get underway, close attention is being paid to the risk elements associated with the new paradigm.

“As SEFs and DCMs [designated contract markets] get ready for trading, and now that clearing is mandatory, there is a whole set of regulatory criteria for them and their clients to comply with,” said Nick Solinger, head of product strategy and chief marketing officer at Traiana. “We are working with our clients to address the implications of this compliance, in particular the need to enforce trading limits on a pre-trade basis.”

Nick Solinger, Traiana

Nick Solinger, Traiana

Javelin Capital Markets filed its Swap Execution Facility (SEF) application with the CFTC to trade Interest Rate Swaps on August 2, 2013—three days ahead of the deadline.

Through its wholly owned subsidiary, Javelin SEF LLC, Javelin will offer institutional customers live, actionable prices through both Central Limit Order Book (CLOB) and Request for Quote (RFQ) execution methodologies.

“We are happy to be one of the first SEF applicants, and are excited to be among the first swap trading platforms to offer dedicated, streaming prices across the swap curve in conjunction with our dealer partners,” said Javelin CEO James Cawley. “Javelin’s highly liquid trade venue is committed to offering greater customer choice and flexibility in this new post Dodd-Frank marketplace.”

TeraExchange filed its application to become a SEF with the CFTC on July 26, 2013.

TeraExchange will empower market participants to trade across various financial instruments including Interest Rate Swaps, CDS Indices, CDS Options and Single Name, NDFs and other cleared OTC products.

“We are committed to being a leading SEF by delivering the most transparent and innovative marketplace available,” said TeraExchange CEO Christian Martin. “We are providing customers across the entire marketplace a robust solution that has been tailored to meet the new regulatory requirements as well as the myriad needs of traders. We are very pleased to be included among the first to file for designation as a Swap Execution Facility with the CFTC and we welcome their oversight in this dynamically changing landscape.”

Traiana, a provider of pre-trade risk and post-trade processing services, said that its pre-trade clearing certainty initiative continues to gain momentum and has received the support of futures commissions merchants (FCMs) and trading venues.

Barclays, BofA Merrill Lynch, Citi, Goldman Sachs, J.P. Morgan and leading buyside institutions have put their support behind the central risk management infrastructure to be the first clearing firms to use Traiana’s CreditLink service to manage swap clearing limits, with deployments underway to meet regulatory deadlines.

“We anticipate that there will be between seven and 12 SEFs, and the market structure will be similar to that which existed in the retail industry before credit cards,” Solinger said. “You could obtain a store credit card that would let you purchase anything up to your credit limit in that particular store, but you couldn’t use it at another store. We are building the equivalent of a Visa or MasterCard network to allow clients to use their credit limits at clearing firms and have it accepted at any trading venue.”

The Traiana service is in live production and is connected to and supported by twelve potential swap execution facilities (SEFs) and designated contract markets (DCMs), including GFI Group, iSwap, Javelin, MarketAxess, TeraExchange and trueEX, and has been built in consultation with major clearinghouses, including CME Group, IntercontinentalExchange and LCH.Clearnet Group.

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