Swap Execution Facilities: From Adoption to Avoidance

Looking to a specific subset of the Interest Rate Swaps (IRS) market within the jurisdiction of the Made available for Trade (MAT) determinations, we see signs of both Swap Execution Facilities (SEF) adoption as well as avoidance. Within the first five weeks of MAT trading there has been a particularly strong migration in volumes onto customer-facing SEFs, such as Bloomberg. There is also evidence of strategies designed to trade away from the new venues.

Some buy-side firms have resorted to “fine tuning” required contracts in order to continue trading Off-SEF. TABB Group has conducted its own analysis to find evidence of this “fine tuning”. We examine a spectrum of forward-starting and backward-starting swaps, as well as swaps with adjusted coupons, swaption package trades, and so-called “broken date” transactions, to see if there is a trend away from SEFs as a result of 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.

We also examine 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 have not only 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.

This TABB Group Focus Note, Swap Execution Facilities: From Adoption to Avoidance, details the current SEF trading landscape in terms of volumes, trade size, turnover, market share, product “fine tuning” and future forecasts.