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Mandated SEF Trading: A Race to the Bottom That Never Happened

Despite concerns that there would be a “race to the bottom” with swap execution facilities (SEFs) putting forward swap products to be Made Available to Trade (MAT), these venues have proved reluctant to do so.

When the Commodity Futures Trading Commission (CFTC) revealed that SEFs would be able to put forward swaps products to be MAT-ed, many in the industry assumed that these platforms would try to MAT as many products as possible in a bid to boosts their volumes.

However, due to both technical issues and pressure from clients, this has largely not happened.

Speaking at a CFTC roundtable in Washington yesterday, Dexter Senft, managing director, fixed income electronic trading at Morgan Stanley, conceded that he was among those that had been wrong in predicting this.

Referring to a previous CFTC roundtable that took place before any products were MAT-ed, he said: “I was sitting in this room, possibly in this exact seat predicting that the MAT rules as described was going to lead to a race to the bottom and everything would be MAT-ed and it would be chaos. And exactly the opposite has happened.”

Sunil Hirani, CEO of trueEX, said that the reason that his firm has been reluctant to put forward products to be MAT-ed is because he feels that they are still at a disadvantage to the incumbents in the market.

Hirani highlighted that in the past two and a half years trueEX has only been able to onboard three of the top five dealers in the markets that it offers trading on, and so, even though their technology is ready for new products and increased volumes, is unlikely to apply for products to be MAT-ed until they have all five onboard.

“If you MAT everything you’re not going to have a competitive market place, because all the business is going to go to the incumbents and there won’t be an opportunity for competitive venues to exist. Even today I don’t think we feel comfortable to file any additional MAT applications because we don’t have all the top five dealers,” he said.

Kevin McPartland, principal at Greenwich Associates, said that the first MAT submission was perhaps too expansive for the industry and that the reaction from market participants discouraged SEFs from seeking to introduce too many new products to be MAT-ed in their own submissions for fear that trading would move away from their platform as a result. As a result, McPartland says that the MAT submissions that followed were scaled back to a more manageable level and were close copies of each of the other SEFs submissions.

“In the months since, as we’ve seen SEF trading grow and investors become increasingly comfortable interacting with The Street electronically, conflicting interests have continued to ensure that MAT submissions will occur infrequently, if they ever occur at all,” he concluded.

This view was certainly supported by the buy side participants at the roundtable, who stressed the challenges they face in preparing for MAT determinations.

“It’s all well and good for the SEFs to be ready to trade and for them to have some connectivity to the dealers, but without involving the asset managers, customers, CCPs and FCMs in the process it’s impossible for us to be ready without chaos on day one,” said Angela Patel, trading operations manager at Putnam Investments.

Arthur Leiz, managing director of Goldman Sachs Asset Management, claimed that the SEFs “tend to portray a rosy picture” of both their own and the markets’ readiness with regards to making new products available to trade.

“What I would call readiness is having a minimum number of dealers connected to their platform systematically, whether it’s via an API, to be able to price the instruments that are coming across in real time. Copying and pasting the instruments out into a spreadsheet to bring into their risk system, that’s not systematic, you might as well be using Bloomberg IB,” he said.

Both Leiz, and Lisa Cavallari, director, fixed income derivatives at Russell Investments, also noted that from a buy side perspective there is also a huge amount of work that has to be done in terms of testing and compliance for each new product that moves on SEF.

As the discussion moved onto whether the SEFs themselves or the CFTC should propose new products to be mandated, the roundtable participants expressed a variety of different views but the general consensus appeared to be that, providing that there is quantifiable data to help this determination and that there was an open industry discussion regarding the new MAT determination, then it becomes less relevant who actually makes the initial proposal. Twitter: @Galen_Stops

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