03.13.2015
By Terry Flanagan

SEF User Perspectives  

As market operators that started from scratch, swap execution facilities’ first order of business was simple: match swaps orders and execute trades. That box can be checked.

“Generally speaking, SEFs meet our needs,” said Boris Liberman, vice president and associate general counsel of AQR Capital Management, which manages $122 billion.

Fulfilling the core mission of a trading venue was critical to gain the confidence of market participants. With basic functionality established, SEFs can work on enhancing their offerings over time, with the objective of providing a more efficient trading experience.

As would be expected in a business that is less than a year and a half old, there is room for improvement.

“The underlying technology still has a ways to go,” Liberman told Markets Media. “It’s a new field, so SEF technology, including connectivity to CCPs and to dealers, has to mature, especially as more package transactions are mandated to be executed on SEFs. The way you accomplish this is to have market participants be active and talk to each other to try to figure out the solution under the regulatory framework.”

Trading patterns on SEFs are similar to those on platforms for corporate bonds in that the simpler, smaller and more standardized trades are more suitable for electronic execution, according to Bob Holland, senior product manager for Linedata’s Longview Fixed Income product. (The order management system is not a SEF, but Holland has clients who trade on SEFs.)

Boris Liberman, AQR

Boris Liberman, AQR

In corporate bonds,  “when traders are doing a large block of something, they pick up the phone and call their friendly neighborhood broker,” Holland said. “The same mentality is in place for trading swaps.’

Holland said one client who has been trading on a SEF from the beginning recently requested new functionality built out to another SEF. “You feel like it’s getting traction,” Holland said of the SEF space. “Like anything else, as people learn the lay of the land and build out their infrastructure, they become more amenable to a different workflow.”

U.S. clients of UBS are “favorable towards SEFs,” said Rana Chammaa, the firm’s head of eDistribution for rates & credit, Americas. “Considering capital constraints continue to impact the banks and their ability to facilitate prices, clients will look for alternative means to execute their orders,” she said.

“The introduction of SEFs has in some ways dragged swaps trading into the 21st century,” said Declan Graham, head of business development, FRC (forex, rates and credit) execution services at UBS. “We now have more transparent markets where it’s easier to trade electronically.”

Greenwich, Connecticut-based AQR thoroughly analyzed the space before submitting its first order to a SEF. “Soon after Dodd-Frank was passed, but well before SEF trading went live, we reached out to a number of SEFs to understand their business models,” Liberman said. “We also spoke with the key dealers and regulators to try to understand the dynamics of how this market function may evolve so we could best prioritize who to partner with and focus our legal, technology and trading resources on.”

AQR deploys sponsored access to interface with SEFs, a model which Liberman likened to futures, where the firm uses brokers’ ‘pipes’ to trade direct market access (DMA) on exchanges.

“We are not direct members of SEFs,” Liberman explained. “The (Futures Commission Merchant) is sponsoring us, but our traders can access SEFs directly. This is different from the traditional agency execution model where you give your trade to an FCM and then an FCM goes to SEF(s) to execute the trade on your behalf.  We have found that we do best for our clients to reduce transaction costs by controlling the method of execution and not outsourcing execution to a broker.”

Featured image via Sergey Nivens/Dollar Photo Club

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