News: DCMs or SEFs for swap trading22 March 2013 | Jon Skinner
TrueEx has registered as a designated contract market (distinct from a SEF) for interest rate swaps and has signed a clearing deal with CME for IRS clearing. ERIS, a futures exchange, is also applying to be a DCM in order to be able to execute swap trades. I’m interested in views as to where this is headed. So far I have gleaned the information below. Firstly, there is some conjecture in the press that SEFs will obselesce in favor of swap DCMs (e.g. http://www.iss-mag.com/regulations-and-compliance/goodbye-swap-execution-facilities-hello-designa). From a quick scan of public documents, the differences are: 1. Block sizes / intraday reporting: latest SEF proposal contains minimum block sizes which are specific to asset class and other product specific parameters whereas DCMs like futures exchanges are subject to the blanket “85% Centralized Market Requirement” so DCMs must set minimum block sizes which mean that a minimum of 85% of volume goes through the order driven exchange rather than being agreed off-exchange and reported to the exchange (as blocks are). On intraday price reporting. DCM blocks need to be reported within 5 minutes, SEF blocks need to be reported within 15 minutes. 2. Order driven protocols / CLOBs. DCMs are traditionally order driven whereas SEFs may encompass both CLOB (order driven) and RFQ (quote-driven) protocols. It is not clear to me whether DCMs can offer RFQ or not? CLOBs need a clearing guarantee to enable anonymous execution (one party doesn’t know the other). DCMs have a client’s clearing broker / FCM guarantee clearing at the point of execution (taking on the risk that clearing fails). SEFs don’t have this mandated but any SEF CLOB will need to address it for CLOB protocols to attract banks to providing liquidity to anonymous buy side members. 4. Open access. DCMs seem to have stronger rules requiring open access than SEFs. The details so far escape me. Finally, it is worth noting that this has a bearing on the swapfutures vs swaps debate. It has been argued that harmonizing some of the rules for swapfutures with swaps would help to level the playing field so that liquidity for the trading of swap-like economics is established in an unbiased fashion. Others argue that the economic bias towards swapfutures is beneficial as this will speed along the standardization which some see as inevitable. Jon S.