Made-Available-to-Trade Pushes Swaps On, and Off, SEFs
By Colby Jenkins, TABB Group
Originally published on TABB Forum
Even as SEF volumes have reached record highs in the wake of the Made-Available-to-Trade determinations, evidence suggests some users are ‘fine-tuning’ contracts in order to continue trading Off-SEF.
Since Made-Available-for-Trade (MAT) determinations came into effect in mid-February, there have been indications of both buy-side adoption of Swap Execution Facilities (SEF) as well as avoidance. Looking at a specific subset of the Interest Rate Swaps (IRS) market within the jurisdiction of the MAT determinations, there has been a particularly strong migration in volumes onto customer-facing SEFs, such as Bloomberg. But there also is anecdotal evidence of strategies designed to trade away from the new venues.
By the end of the sixth week of mandatory SEF trading, average monthly value traded On-SEF for IRS contracts bound by SEF execution mandates rose from a pre-MAT average of $540 billion to a record $824 billion. In notional terms, the volume of MAT Credit Default Swaps (CDS) traded On-SEF has grown by 350% since the first week of required SEF trading; during that same period, average value traded On-SEF for USD IRS grew just over 60%.
However, for smaller swaps users not already trading via SEFs, the MAT deadline represented a costly, cumbersome process of SEF on-boarding. As a result, TABB Group analyzed historical trade data looking for indications that some buy-side firms have resorted to “fine-tuning” required contracts in order to continue trading Off-SEF. We examined a spectrum of forward-starting and backward-starting swaps, as well as swaps with adjusted coupons, swaptions, package trades, and so-called “broken date” transactions, to see if there is a trend away from SEFs following the MAT determination. Indeed, a test for potency of SEF-execution mandates is the ease with which participants can manipulate the terms of would-be MAT contracts into equally standardized, yet non-mandated swaps.
What we discovered is that even for a limited subset of MAT contracts to which we applied our analysis, the evidence of “fine-tuning” is murky at best. While, in broad strokes, we did find that there was a significant growth in the combined notional volume traded in March for both forward-starting and backward-starting swaps, it is hard to describe the phenomenon as a trend (see Exhibit 1, below).
Exhibit 1: Notional Forward/Backward-Starting MAT IRS Off-SEF, $Bn
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Looking to the SEF market share landscape, we see liquidity growing increasingly concentrated in the MAT trading environment. Specifically for credit default swaps trading On-SEF, this has been a trend since early SEF days, with dealer-to-client venues capturing the vast majority of liquidity. Within rates, however, we see a more significant shift recently, with Bloomberg capturing a majority of the newly mandated product set traded via SEF. Looking across both rates and credit, Bloomberg’s success is even more apparent (see Exhibit 2, below).
Exhibit 2: SEFs Ranked By Aggregate Notional Traded Week of March 17-21 , $MM
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Source: TABB Group, Clarus FT
We also examined changes in trade size and turnover as the swaps market becomes more electronic. Since the inception of MAT trading, there has been noticeable increase and decrease in turnover velocity for On-SEF and Off-SEF trades, respectively. Our analysis indicates that MAT determinations not only have influenced where a majority of rates contracts are being traded, but also changed the way in which these contracts trade. While trade sizes are falling and turnover rates are increasing On-SEF, for example, the opposite effect can be found Off-SEF.