Swap Trading Offers Choices

Terry Flanagan

Market participants are evaluating trading on swap execution facilities and how they may adapt their derivatives trading operations to comply with new regulations. The share of U.S. investors reporting they trade a portion of their overall swaps trading volume electronically jumped from 23% in 2013 to 41% so far in 2014, according to a recent report by Greenwich Associates. Another 20% of respondents said they plan to start trading electronically in the next 12 months.

Tradeweb has seen its volumes increased 20 fold to trading volumes of $20 billion in the first two weeks of September compared to the first two weeks of trading on SEFs in October 2013. “We’re looking at marketplace where a year ago, less than 5% of interest rate derivatives traded electronically, and now about 50% of trades are executed on SEFs,” said Chris Amen, head of U.S. institutional rates markets at Tradeweb.

Greenwich Associates research shows that the top two platforms for investors trading interest-rate swaps electronically — Tradeweb and Bloomberg — remain the same today as they were before SEF rules came into effect, with data also showing the majority of investors continue to prefer trading via name give up request for quote, which is most similar to the old way of phone trading as is possible under the CFTC’s rules.

Tradeweb operates two SEFs: TW SEF is its fully disclosed RFQ marketplace, and DW SEF is its CLOB market place. “The volume increase mostly occurred on the RFQ, but we have also seen growth in volumes on our CLOB on DW SEF,” said Amen. “That’s a SEF that anybody can get access to, subject to meeting the requirements of that rule book and that marketplace.”

Clients have a choice in how to access the swap market, but “I would argue that they’re actually making the choice to continue to expand their swap trading on SEFs, as the electronic-trading efficiencies that they’re experiencing are real,” said Amen. “We’ve seen that not only in just the pure price-discovery aspects of our platform and the RFQ protocol, but compression trading to straight- through-processing and the netting application that we support.”

Amen added, “This is clearly a really viable marketplace, and clients have moved beyond “How do I understand the legal regulatory framework?” to “How can I move more and more of my business onto the electronic platform?”

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