February 13, 2014

Bloomberg adds sponsored access – Agency Execution lift off? | FT article

Bloomberg's announcement Wednesday published in the FT(subs. required) that it is going to allow sponsored access into its SEF may be another key step in the emergence of agency execution as a new way for buy side firms to trade swaps.

Bloomberg's announcement Wednesday published in the FT (subs. required) that it is going to add sponsored access as a channel into it's SEF may be another key step in the emergence of agency execution as a new way for buy side firms to trade swaps.

This news follows on from my prior post: Will agency execution be needed to make MAT work?

Thoughts below.

Some terminology

"Sponsored access" refers to an FCM giving access to a market without the end user onboarding and operationally integrating to each SEF

"Agency execution" refers to the fact that the FCM is an execution agent in the trade (between the end user and the other counterparty) rather than taking the trade onto its books as the counterparty

"SEF aggregation" refers to the service of providing access through a single portal to prices on multiple SEFs obviating the onboarding and operational integration

Just to deliberately confuse, these terms are often used interchangeably for what is largely the same thing – henceforth referred to as "agency execution"

Who's using agency execution?

According to a quote in the article Credit Suisse says "many clients" are planning to use this service to comply with SEF MAT on Tuesday.

From a client perspective the natural appeal would be to lower volume / lower size clients who have least economies of scale around the relatively fixed up front costs of onboarding and integration to each SEF.  However, there could be appeal further up the size / volume scale too – just like in the futures introducing broker model.

I expect we won't find out quickly who is using it given the desire for confidentiality in general and sensitivities on association with early-stage adoption.

Who's providing it?

Though there may be others, the publicly declared agency execution players so far noted are Credit Suisse, UBS.  Natural – given Swiss banks seem to be the most under the capital cosh from prudential regulators and UBS' recent declared substantial withdrawal from fixed income derivatives among other businesses.

Agency execution looks like a revenue loser for dealers – sacrificing more generous bid-offer spread in the traditional principal market-making business for slimmer agency execution commissions. Further, if IDBs allow sponsored access as GFI has done this could be a way other than via direct access that the traditional split between D2D and C2D markets breaks down.

On the other hand in practice it could be another banks principal market-making revenue that an agency execution broker is threatening and with next to no reg capital involved it can only improve ROE / reduce capital burdens whilst maintaining client relationships.

A delicate bank-specific decision then, balancing firm-level capital points of pain against business line revenue protection perspectives.

But then of course there are also shadow banks i.e. non-bank broker dealers / FCMs who may get in on the act without having to necessarily be market makers.

The takeaway

My eye's out for more evidence of client take up and additional providers.  Please let me know additional public information you may have.

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