SEFs In Perspective

Terry Flanagan

As U.S. swap execution facilities head toward the six-month mark of the Made Available to Trade era, questions about how much swap activity is taking place on SEFs are giving way to questions about how much swap activity is taking place at all. For buy side firms, trading on-SEF or off-SEF is less important than having price discovery mechanisms.

“We do not think there is a lack of liquidity, and there is certainly liquidity in what products have been MAT’d,” Chris Amen, head of U. S. institutional rates markets at Tradeweb, told Markets Media.

“The question is on the rest of the curve, where the buy-side wants to go and move,” he continued. “From our perspective, it’s not so much about trading on a SEF but more about trading derivatives electronically holistically. I think the buy-side is much farther ahead there than where the sell-side is right now, so the sell-side definitely needs to catch up. And we will see that happen over the next few months.”

In the D2C (dealer-to-consumer) SEF segment, Tradeweb vaulted into the number one position in interest-rate derivatives last week, edging out Bloomberg, according to SEFView.

“Perhaps the most striking news gleaned from last week’s data is the performance of Tradeweb,” said Tod Skarecky, head of research at Clarus Financial Technology, in a blog posting. “By the end of the week, Tradeweb had put through the largest total (5YR duration-adjusted) flow. In fact on Friday, they reported 100% larger activity than Bloomberg. Is this due to the end of package trade relief, long overdue adoption by the buyside, or just a blip in the data?”

Chris Amen, Tradeweb

Chris Amen, Tradeweb

The question in the buy-side community is whether SEFs have sufficient liquidity. From Tradeweb’s viewpoint, the answer is yes.

“As a SEF with a long standing in the derivative space, as well as a multitude of active participants on our SEF, we’re in an advantageous position to provide the buy-side with solutions not only for the trading mandate, but support of a full portfolio of trading types and product coverage as they move their overall businesses to an electronic environment,” Amen said.

A consistent theme that Tradeweb is observing “is the buy-sides’ traction in terms of setting up their infrastructure to trade derivatives electronically,” Amen said. “We’re working with many of them right now on completing the level of integration they need to support various strategies and trading styles. That’s either focused on integration into order management systems, or specifically working through their trading style–when they were doing certain trades over the phone, instead utilizing our platform to execute this trade electronically.”

In Europe, where execution requirements won’t kick in until the end of 2016, Tradeweb operates an MTF in Europe, and is not planning changes to its legal structure or regulatory structure yet. “There is a lot of buy-side concern about Emir and if there is going to be fractured liquidity because of different regional regulatory mandates,” Amen said. “Given the focus on the buy-side community and the regulators, we could see this evolving. And because we offer both MTF and SEF trading, we feel like we are well covered in both regions.”

He added, “There are firms that trade off the SEF, such as non-US persons who trade off-SEF. We have a lot of European firms that trade dollar swap products, but they are trading off-SEF. They access those marketplaces through our MTF.”

Featured image via Andrey Burmakin/Dollar Photo Club

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