OTC trading

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It’s only a matter of time before more investors move away from foreign-exchange (FX) swaps to FX futures, according to the latest research from Kevin McPartland, head of market structure and technology advisory service at analyst firm Greenwich and friend of the blog.

He attributes the coming migration due FX swap’s higher regulatory and margin costs, even though regulators exempted them from many swap requirements, and the lack of need by financial users for custom FX swap products compared to their corporate counterparts.

Check out his blog for more opinions and analysis on the OTC derivatives marketplace.

 

 

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Javelin SEF is the first swaps execution facility (SEF) operator to submit a list of potential instruments that the electronic trading platform would like to “make available to trade” to the US Commodity Futures Trading Commission (CFTC), Bloomberg’s Silla Brush reported on October 19.

Greenwich Associates’ Kevin McPartland, who is quoted in the story, offers expanded analysis in a blog post of his own.

It’s not surprising that an all-electronic operation like Javelin was the first to break the surface tension with such a broad instrument list since it has no interest of keeping these transaction voice-based.

The CFTC has 90 days to decide whether to approve or reject Javelin SEF’s list. If it does not extend its decision deadline, traders will be required to execute trades for dollar-, sterling- and euro-denominated interest rate swaps on SEFs starting in mid-January 2014.

The regulator also started the clock ticking on a 30-day industry comment period for the SEF’s list that began on the filing date and, hopefully, will provide interesting opinions.

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I’ve spent far more time today updating The SEF Scorecard than I originally intended. Little did I know that HTML and Cascading Style Sheets (CSS) are twin works of Satan, but more on that later.

Bloomberg started the summer as the first SEF operator to receive temporary registration from the US Commodity Futures Trading Commission (CFTC), but now the field is starting to get crowded. GFI Group,  MarketAxessState StreetTradeweb, each  received temporary approval from the CFTC recently. This leaves the 10 remaining SEF operators cooling their jets while they wait for their regulatory approval.

 

 

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Okay, this post’s title is a little misleading. I doubt that any trader would to apply the standard high-frequency trading strategy, which constantly pennies orders throughout the day but does not leave any open positions at the end of the day, when it comes to over-the-counter (OTC) swaps trading.

What has garnered my attention is the Commodity Futures Trading Commission’s (CFTC) trade reporting embargo rule that prevents swaps execution facilities (SEFs) from sharing recently executed trade details with other SEF participants before the SEF’s system releases the trade details to a swaps data repository (SDR).

Such a set up is going to lead to an unholy mess once dealers and non-dealers begin trading on SEFs. It is going to lead to a replay of flash-order headache that happened in the equities market a few years ago.

Yes, I know that the two markets aren’t carbon copies of each other. However, this embargo market data embargo will create a bifurcated market data model consisting of participants taking their feed directly from the SEF and those who will rely on data aggregator or SDR feeds.

According to a few well-placed industry sources, they expect SDRs to operate at the same pace as FINRA’s TRACE reporting platform. That might be fine for manual voice trading, but not when SEF matching engines run at millisecond speeds.

I can see both sides of the argument. Given the very illiquid nature of the OTC swaps market, flashing prices of recent trades helps provide additional liquidity. Yet, to take advantage of it, a market participant will need a direct link to the SEF. That’s an expensive proposition as more and more SEF operators come out of the woodwork.

Large dealers may be able to take on those additional market data costs given the large trade volumes they execute, non-dealers likely will balk at the situation.

In the equities market, all of the exchanges decided to retire their flash orders before the Securities and Exchange Commission (SEC) needed to make an official ruling on the order type. I do not think the CFTC will have the same luxury.

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There are only 33 days left before all the firms that the US Commodity Futures Trading Commission (CFTC) designated as Category-2 entities must central clear the majority of their over-the-counter (OTC) swaps trades and the next four or five weeks and it looks like it will be hellish for more than half of them.

Do not expect anyone working to meet this deadline to attend your Memorial Day barbecue or expect them to have any thoughts on summer blockbusters that opened before June 11.

According industry research firm Celent, 48% of buy-side firms are still looking for clearing or collateral management partners, 24% are almost ready to meet the deadline and 28% are ready to clear trades and handle the new collateral requirements, according to data from the firm’s latest research report Maximizing Collateral Advantage.

Celent analysts interviewed more than 25 Tier-1 (30%), Tier-2 (33%) and Tier-3 (37%) buy-side firms based in Europe (33 %), North America (33%) and Asia (26%) for this study.

A Celent analyst shared these findings during an industry round table on strategic margin management, which Omgeo and DerivSource hosted yesterday.

Although the numbers sounds dire, one round-table attendee estimated that although Category 2 has more members than Category 1 or Category 3 but that those firms trade swaps only three or four times a year. He added that the market already clears most of the OTC swaps volume and has since March 11, when Category 1′s swaps dealers, major swaps participants and active funds began meeting their mandatory clearing obligations.

I’m much better at citing sources usually, but I needed to promise not to quote or identify participants or attendees directly to attend this no-press industry event.

Panelists and attendees also questioned the conventional wisdom that an estimated 2,000 counterparties will need to clear trades. Many thought the figure was closer to 600 and that 2,000 might have referred to sub-accounts, but not financial institutions or legal vehicles.

By the wee hours of June 11, most buy-side organizations will know how well they prepared for the CFTC deadline when the first margin calls start arriving. Those who did a good job of taking into account the added clearing and affirmation expenses will be fine. Those who had not are going to have some real uncomfortable conversations with their supervisors.

If you are in London and want to benchmark your firm’s preparedness against that of your industry colleagues, Omgeo and DerivSource will host the same event locally on May 23. It’s worth a look.

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