TeraExchange Expands in Europe
TeraExchange, a U.S. swap execution facility, has signed up two European inter-dealer brokers despite a fall in cross-border trading since the implementation of the Dodd-Frank financial reform act.
Under Dodd-Frank, all swap trades with a US counterparty, whether traded domestically or internationally, must be executed through a swap execution facility registered with the Commodity Futures Trading Commission. Therefore any inter-dealer broker with US clients needs to either register as a SEF or execute their trades through a SEF.
The International Swaps and Derivatives Association said in a report this month that volumes of cleared euro interest rate swaps between European and US dealers have fallen by 77% since the Dodd-Frank SEF rules started coming into effect in October last year.
ISDA said in the report: “68% of respondents indicated non-US persons have reduced or ceased trading activity with US persons.”
Christian Martin, chief exchange of TeraExchange, told Markets Media: “It stands to reason that market participants will be slow in coming to a new regulatory regime as end users gain confidence that proper procedures are in place. We have done analysis of other regulatory changes and in every case volumes slowed in the early days as people crawled towards the big bang dates.”
TeraExchange has signed agreements with OTCex and RP Martin, two European inter-dealer brokers, to provide Dodd-Frank compliant execution and reporting services, so that OTCex and RP Martin do not have to register as SEFs or use platforms developed by their rivals.
“We believe in the agency model and we complement their business by providing a solution without them having to go to their competition,” Martin added. “The agreements with OTCex and RP Martin allows us to scale internationally faster than we could have organically and we built the firm with this opportunity in mind.”
Martin said TeraExchange has between half a dozen and a dozen other deals in the pipeline and there are similiar opportunities in Latin America and Asia.
There is currently no difference right now between TeraExchange’s US and European offerings but Martin said the firm will begin to embrace the requirements of European organised trading facilities (OTFs).
This month European lawmakers agreed revisions to the Markets in Financial Instruments Directive governing trading in the region which included moving over-the-counter non-equity derivatives to an OTF. MiFID II introduced these new venues which could be defined as the European equivalent of US SEFs.
“We can envisage the ‘equification’ of swap trading and the entrance of programmatic traders to a market they could not previously access,” added Martin. “Our system was built for that transformation. We are the only SEF that can provide RFQ as well as a central limit order book domestically and internationally which is a completely new horizon.”