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March 13, 2014

SEF MAT Week 3 numbers hide lack of real progress

Another week is in the books and last week US reported IRS volumes perked back up close to averages.  Drilling down does not flatter SEF progress however given off SEF volumes increased substantially more than on SEF and only USD SEF MAT volumes increased.  The most important improvement factors (CLOB, standardization) are not easy to guage but anecdotally are going very slowly.

Another week is in the books and last week US reported IRS volumes perked back up close to averages.  Drilling down does not flatter SEF progress however given off SEF volumes increased substantially more than on SEF and only USD SEF MAT volumes increased.  The most important improvement factors (CLOB, standardization) are not easy to gauge but anecdotally are going very slowly.

Following my week 2 post and complementing Amir's week 3 post I explore below what's going on.

Week on week drill down

On SEF volumes for G4 were up 9% with USD up 11% and now a bit above the January average, but EUR and GBP (newly MAT) both down week-on-week.  

Off SEF volumes for G4 were up 26% with USD up 33% and now 30% above the January weekly average, EUR up 28% and GBP down 8%.

What does that tell us?

It's clear that a simple decline is not what we're looking at but the figures seem to be showing a couple of trends.  

1.  SEFs continue to volume-underperform the wider swap market given their disproportionately low share of the weekly uptick in USD / EUR market activity despite MAT.  

2.  EUR and GBP are starting to look like a consistent downward SEF volume trend – perhaps offshore or perhaps just off SEF MAT products.  

What's really going on here?

SEFs offer a few prospects all rolled into one (for IRS): 

1.  Acceleration of the already happening shift to automated RFQ in pre-existing C2D oriented platforms like TradeWeb and Bloomberg

2.  Inclusion of voice-enhanced RFQ usually in IDB D2D platforms given their history in D2D voice broking

3.  Encouragement of the non-mandatory CLOB order-driven protocol which previously had traction in one or two D2D platforms e.g. iSwap and DealerWeb but is the intent of both incumbent C2D platforms as well as start ups including Javelin, Tera, TrueEx

Unfortunately the public reporting doesn't distinguish these things but anecdotally the majority of the new SEF volume is in 1 and 2 and IDB voice enhanced RFQ or C2D RFQ and CLOB trading involves few if any clients.  To have wide access the CLOB idea really also depends on a shift to standard swaps i.e. IMM or MAC swaps which there is little evidence of so far (despite IMM / MAC swaps inclusion in USD MAT products even though there is little volume to date outside of a few very particular clients).

What next?

In my view though a major change of transparency, pricing power and liquidity will only come if there is both product standardization (IMM swaps) and wider access of clients to CLOBs.  However, expanding product scope e.g. adding packages or wider date scope presumably will result in expanding RFQ SEF trading.  Expanding from RFQ 2 to RFQ 3 can give some improvement in pricing power to the buy-side.  Nothing obvious will advance CLOB access / liquidity.

Who really wants CLOBs?

Remember the larger buy side firms were quite vocally happy with the pre-existing status quo in RFQ leaving only really regulators and a few smaller clients really pushing the CLOB / standardization thing.  

So this leaves a minority of dealers like UBS pushing agency execution access to IDB CLOBs plus some smaller buy side firms and regulators pushing the CLOB idea via incumbent C2D RFQ platforms.

Conclusion

Without a CLOB mandate, perhaps CLOBs will take off but I wouldn't bet on the above coalition being strong enough to move it along just yet.

If it is not moved along, the whole SEF edifice start to look like emperor's new clothes.


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