Weekly Roundup | 13th July 2014
A selection of the past weeks stories
US & EU Liquidity Splits?
Cross-border harmonization in swaps trading is being threatened by an impasse over multilateral-trading facilities (MTFs). No European firms have applied to become MTFs, the European equivalent of the Swaps Execution Facilities (SEFs) created by Dodd-Frank regulations in the US, and firms have reportedly been trading off-SEF to preserve liquidity. At issue is Europeans’ need for seamless access to US dollar swaps liquidity and the definition of MTF. Some say the CFTC needs to allow for one liquidity pool for all participants, but the rules appear to create a separate liquidity pool for US persons trading euro swaps. Venues have been unwilling to spend the money required to build the infrastructure and create the supporting legal documentation necessary to create a liquidity pool for US persons to trade euro swaps, especially if the two pools of liquidity would be unable to interact.
Swap Futures Make Gains
There has been an increase in the volume of swap futures, but this upward trend might not necessarily be a sign that market participants are fleeing OTC products. The standardized nature of swaps futures make them less useful for the very precise risk management that has make OTC swaps popular. In addition, there is uncertainty around the long-term regulatory treatment of swap futures. Meanwhile, an International Swaps and Derivatives Association (ISDA) survey finds a large majority of market participants expect to use OTC swaps going forward.
Trad-X CLOB Volume Picks Up
Central limit order book trading at Trad-X of USD interest rate swaps accounted for a third of all USD swaps done at Tradition in June. That’s particularly impressive considering CLOB electronic execution was nonexistent 18-months ago. Trad-X reference pages are based purely on electronic pricing generated by the Trad-X central limit order book, rather than being generated by indicative pricing via voice. Although, in general, this type of trading is concentrated among dealers transferring risk, perhaps sustained growth in CLOB trading on Trad-X over the next few months will get more of the buy side to take notice.
Bloomberg Trading Plays
Bloomberg acquired RTS Realtime Systems this week in a move that the company says will improve its speed and global reach. The acquisition complements Bloomberg’s data, analytics and order management strengths, and will expand Bloomberg’s reach into global exchange traded derivatives. The next step for Bloomberg will integration of Bloomberg Swap Execution Facility (BSEF) swap trading with exchange traded derivatives (ETDs) and development of an optimizer tool for front end trading decisions. This is all on the heels of last week’s discussion about BSEF’s incredibly low $10 per trade SEF charge.
CCPs to Disclose Further Details on Margin and Default Fund Models
Clearing houses are changing their stance, agreeing to much more transparency into margining models and risk models used to calculate resources in a default scenario. Standards are being jointly developed by the International Organization of Securities Commissions (IOSCO) and the Committee on Payment and Settlement Systems (CPSS). The more cooperative posture came as clearing banks began to realize they are dependent on the health of their members and the clearing house, and a better understanding of the clearing house’s risk models could put the industry on stronger footing. A default of a Korean firm in February where the clearing house passed costs on to members also highlighted the importance of transparency. Clearing houses use many models, and the transparency will focus on initial margin, haircut rates, disclosure standards, and eligible collateral.
http://on.ft.com/1pWxE9y (FT subs)
Repo Financing Concerns, Increased Fails Are a Worry
Repo markets are growing increasingly uneasy. With monetary policy keeping rates at historic lows, and dealers holding less inventory as a result of regulatory requirements, trades for repurchase agreements, known as repos, are going uncompleted at some of the highest rates since the financial crisis. Banks rely on repos for their daily financing, and many say a loss of access to repo financing contributed to the failures of Lehman Brothers and Bear Stearns. The concern is banks might not be well-prepared to handle a surge of activity is if there is a sudden shift in the market.