November 20, 2013

Will agency execution be needed to enable MAT to work? | IFR article

How will D2D SEFs Open Up?

Given the recent CFTC push to open up D2D trading platforms to clients, how can a SEF get comfortable enough in a client's guaranteed execution and clearing to prevent clearing rejections?   It may be hard to assess while so much credit checking infrastructure is under construction whether credit checking via FCMs and credit hubs and FCM intra-day margin buffer arrangements are adequate.

Agency execution brokers may be an answer

Somewhat like a futures / equities introducing broker, a swaps agency execution broker would sit between the client and the SEF between execution and clearing acceptance – guaranteeing the trade in the cases of client default, failure to clear, or allocation failure.  In addition they would potentially provide clients with:

  • Direct access, connectivity and price aggregation access across multiple SEFs (shielding the client from infrastructure costs and pricing complexity)
  • Execution anonymity to the client (both in anonymous CLOB SEFs and disclosed name RFQ SEFs)
  • The ability to respond to RFQs as well as in submitted RFQs or CLOB orders

Dealers choice

Client benefits might be clear but bank dealers may  face a more difficult risk reward trade off between

  • Significant bad times execution losses: one client default / clearing failure / block allocation problem in volatile markets could yield significant losses
  • Eroded good times revenues: cannibalized D2C swap spread revenue plus agency commissions priced in good times which may not cover bad times losses

Worse – even if a bank hesitates to jump into the agency execution business – their clearing broker may not avoid some of the execution risks as a bi-product of CFTC / SEF rules and regulations.

UBS clearly believes they can make a go of this – see IFR article (free).  

Questions:  How many others will follow?   Is this needed for "made available to trade" (MAT) to work?

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