Article: Will agency execution be needed to enable MAT to work? | IFR article

20 November 2013 | Jon Skinner

How will D2D SEFs Open Up?

Given the recent CFTC push to open up D2D trading platforms to clients, how can a SEF get comfortable enough in a client's guaranteed execution and clearing to prevent clearing rejections?   It may be hard to assess while so much credit checking infrastructure is under construction whether credit checking via FCMs and credit hubs and FCM intra-day margin buffer arrangements are adequate.

Agency execution brokers may be an answer

Somewhat like a futures / equities introducing broker, a swaps agency execution broker would sit between the client and the SEF between execution and clearing acceptance - guaranteeing the trade in the cases of client default, failure to clear, or allocation failure.  In addition they would potentially provide clients with:

  • Direct access, connectivity and price aggregation access across multiple SEFs (shielding the client from infrastructure costs and pricing complexity)
  • Execution anonymity to the client (both in anonymous CLOB SEFs and disclosed name RFQ SEFs)
  • The ability to respond to RFQs as well as in submitted RFQs or CLOB orders

Dealers choice

Client benefits might be clear but bank dealers may  face a more difficult risk reward trade off between

  • Significant bad times execution losses: one client default / clearing failure / block allocation problem in volatile markets could yield significant losses
  • Eroded good times revenues: cannibalized D2C swap spread revenue plus agency commissions priced in good times which may not cover bad times losses

Worse - even if a bank hesitates to jump into the agency execution business - their clearing broker may not avoid some of the execution risks as a bi-product of CFTC / SEF rules and regulations.

UBS clearly believes they can make a go of this - see IFR article (free).  

Questions:  How many others will follow?   Is this needed for "made available to trade" (MAT) to work?


Thanks Jon. Good article, and this certainly bears watching. Agency model seems to make sense. Also seems like something the custody banks would consider, given their overall agency model.

Given the recent CFTC push to open up D2D trading platforms to clients, how can a SEF get comfortable enough in a clients guaranteed execution and clearing to prevent clearing rejections? The OTC Space:Will Agency Execution Be Needed to Enable MAT to Work? | IFR Article.

to gain access to the needed SEFs. (Other incentives are discussed in a good post on the topic here.) Whats changed since the November 14th guidance is the last part the number of

The question is whether you can be an agency execution broker without being a clearing broker (given the attendant capital burden from B3 and CFTC). If so custody banks may get interested. If not maybe not.Also in the US, FCM clearing brokers are staring at taking on the temporary execution risk by default - otherwise how do you clear for an asset manager which trades a block but doesn't go on risk until the allocation. If they look to charge for this service they are kind of in agency execution by the back door anyway.