With mandated trading on swap execution facilities (SEFs) already underway and with more instruments likely to be added soon, swap market participants have seen a need for more integrated technology to navigate this environment.
Part of the problem with the current SEF-based trading environment is that the overall market liquidity is too fragmented, with 24 SEFs registered with the Commodity Futures Trading Commission (CFTC). In terms of systems used to facilitate trades, what participants “really want is something to look across SEFs and be able to determine where the best value for their dollar is,” says Jim Myers, Sapient Global Markets’ senior manager, business consulting, trading and risk management.
While many in the industry think that SEFs will inevitably consolidate, the multitude of facilities could still cause liquidity problems absent solutions that can ease workflows.
“Abstracting and streamlining the trade flow and trading processes across multiple SEFs and clearing members will become very important,” says Jack Callahan, executive director at CME Group, which operates its own clearinghouse. “Many firms have elected one or two SEFs to begin [trading] with, but we could see niche liquidity pools arise in various locations. To be able to support access of many liquidity pools, having a solution that meets their trade flow needs across SEF and clearing members is important.”
And the technology needs of SEFs have also grown as they now need to support multi-instrument package trades, says Callahan, following the CFTC’s mandate last month for certain package transactions to be traded on SEFs.
As firms trade more of these instruments, and as regulators plan to push other types of derivatives onto these facilities, buy-side firms are also looking at ways to simplify the trade lifecycle. One solution, says Dan Gavin, director of product management, Eze Software Group, should be to use an integrated order management system (OMS) using straight-through-processing, so that users only have to enter order information once, and then have that information flow through to the middleware providers for pre-trade credit checking and post-trade processing, including all the way downstream to central counterparties and swap data repositories (SDRs).
“The overall TCO (total cost of ownership) is a concern for our client base, and being able to cut down on the number of order entry points is paramount,” says Gavin.
Sapient’s Myers agrees that firms should look to integrate derivatives systems around risk management, settlement processing, reporting, etc. “Ultimately, as a target operating model, you want that integrated as much as possible,” he says.
Going forward, trading volumes are likely to increase, while the complexity is also likely to increase as the market becomes more regulated.
“We’re seeing our clients moving into more complex strategies and therefore new asset classes that ultimately are being pushed into a more regulated environment, with regards to clearing and execution, so therefore, I think this is a demand that we’re going to see grow exponentially,” says Gavin.
More Technology Integration Needed for Swaps Trading, Say Industry Participants
With mandated trading on swap execution facilities (SEFs) already underway and with more instruments likely to be added soon, swap market participants have seen a need for more integrated technology to navigate this environment.
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