SEF Trading October 2014: An Expanding Universe

The standards that once dominated early Swap Execution Facility (SEF) trading have shifted and participants are beginning to explore a growing number of options for execution methodologies and pricing mechanisms. In our initial report, Swap Execution Facilities: From Adoption to Avoidance, we investigated the noise around evasive, Off-SEF trading strategies designed to circumvent regulation during the initial months of Made-Available-to-Trade (MAT) determinations being in effect. Apart from scant anecdotal evidence, we found few indications that this was occurring. Today, in fact, this suspicion persists. And despite the ongoing growth of the IRS and CDS SEF markets within the US, many are still concerned about an exsanguination of these markets due to cross border liquidity fragmentation.

Within this report, we discuss how challenger SEFs offering new and alternative trading protocols for swaps such as Central Limit Order Books (CLOB) and electronic RFQ have grown significantly; while initially securing a negligible market share, today, these SEFs capture nearly a quarter of SEF activity. We also analyze the migration of activity in terms of SEF client base. Dealer-to-Dealer (D2D) SEFs, which enjoyed over 95% of notional volume traded via SEF initially, are starting to lose ground to new client-facing D2C SEFs. Now, we are seeing upwards of 40% of activity for rates transact through D2C platforms. For credit, market share flows among D2C and D2D SEFs have been considerably more static, with over 90% of credit volume still transacted though D2C SEFs.

This TABB Group Focus Note, SEF Trading October 2014: An Expanding Universe, is the second in a series of TABB reports analyzing publically available SEF data to identify emerging trends in volumes, trade size, turnover, market share and to track how closely the evolving SEF market falls in line with regulatory goals.