Article: SEFs: Who's joined the party?

09 September 2013 | Amir Khwaja

Nearly 2 weeks ago, Tullet Prebon announced their SEF filing with the CFTC, which inspired me to do some research into the SEF registrations to date. I blogged about it here; who they are, what they had planned to provide, etc. Towards the end of the blog, I posed the question, where were ICAP, BGC, and Tradition? For an update, please see my article "SEFs: Who's joined the party?" Tod Skarecky


A useful grid thanks Amir / your colleague.A few things:- It would be useful if you could gather the intended DCOs per SEF on the grid- TrueEx is also a swap DCM. Are there any others like that?- Does the registration documentation contain info on whether they intend to support RFQ, CLOB or both SEF variants? This will give a clue into whether targeting sell side or buy side or both which are very much two different markets today and probably into the future.It's interesting what will happen: my sense is that since a SEF can connect to both CCPs directly, liquidity will not be driven by clearing margin efficiency concerns and therefore there is not very much standing in the way of SEF market consolidation to an oligopoly of a handful of D2C SEFs and a handful of D2D SEFs quite quickly (e.g. a year or less) whereas CCP market share may take quite a long time to settle out as critical mass of portfolio risk transitions from bilateral over several years. After all though SEF trading is mandatory, providing quotes to a given SEF is not. Dealers are bound by commercial incentives (go where the client is, minimum liquidity requirements / other commercial incentives of their SEF memberships / equity stakes) to provide liquidity. So SEFs which don't have strong commercial incentives on buy side firms or sell side firms or both and are not already established as swap ECNs (e.g. Bloomberg) may well expire quite quickly unless they have something really unique (e.g. CCP spread trade pricing on Trad-x, ) that attracts market making dealers. The quote streaming is largely technology that can be turned off overnight so the liquidity drop off in the also ran platforms could happen really suddenly....

I find State Street to be interesting in this space. I believe that they are leveraging CurrenEx, which gives them the FX side and they add rates. It is a change for a post-trade processing company strategically, and the move of Jeff Conway into this space signals its importance to the bank. Are they trying to build an execution business and take away market share from the traditional sell side? We know that they are adverse to engaging the sell side as clients. I would be curious to know how they have done relative to their dominant buy side servicing business in capturing clearing business -- no one seems to know the numbers. State Street appears to have limited execution appetite, which would reflect their conservative posture in the market. But is this defensive, or an offensive assault on the sell side? If it is the latter, is it a viable model?