London, 9 April 2014
TABB Group sees signs of buy-side firms both adopting and avoiding Swaps Execution Facilities (SEFs) since mid-February when Made-Available-to-Trade (MAT) determinations went into effect, now seen driving SEF volumes to record highs.
Within Interest Rate Swaps (IRS), the incumbent Dealer-to-Dealer (D2D) SEFs have dominated SEF volume, says TABB research analyst Colby Jenkins in a new research note, “Swaps Execution Facilities: From Adoption to Avoidance.” For the first several months of trading, these SEFs captured between 93% and 97% of total volume traded On-SEF. On the credit side, TABB sees a contrasting market share landscape. “Within the past two weeks, 87% of volume executed On-SEF for credit was through newly-established Dealer-to-Customer SEFs.”
For smaller swap users not already trading via SEFs, Jenkins says the MAT deadline represented a costly, cumbersome process of SEF on-boarding. “It may prove easier for some firms to simply fine-tune the instrument, so that it becomes non-MAT so they can continue to trade Off-SEF. However, to-date, evidence of this occurring remains murky.”
The 9-page report with 11 exhibits addresses the extent of product “fine-tuning” designed to bypass the MAT determinations, looks at how MAT has influenced both where swaps trade for SEF market share and the way they trade in terms of trade size and turnover rates. It also examines a spectrum of forward-starting and backward-starting swaps, as well as swaps with adjusted coupons, swaption package trades and so-called “broken date” transactions, to see if there is a trend away from SEFs as a result of the MAT determination.
Since the inception of MAT trading, there has been noticeable increase and decrease in turnover velocity for On-SEF and Off-SEF trades, respectively. “Our analysis indicates MAT determinations have not only influenced where a majority of rates contracts are being traded, but changed how they trade,” says Jenkins. “While trade sizes are falling and turnover rates are increasing On-SEF, for example, the opposite effect can be found Off-SEF.”
According to TABB, by the end of the sixth week of mandatory SEF trading, average monthly value traded On-SEF for IRS contracts bound by SEF execution mandates grew from a pre-MAT average of $540 billion to $824 billion. In notional terms, the volume of Credit Default Swaps (CDS) traded On-SEF has grown by 350% since the first week of required SEF trading; during that same period, average value traded On-SEF for USD IRS grew just over 60%.