Trading Too Thin to Support OTC Platforms
By Jeremy Grant
November 8 (The Financial Times)
Trading activity in key over-the-counter (OTC) derivatives markets is too thin to support the anticipated proliferation of OTC trading platforms – known as “swap execution facilities” (SEF) – as a result of reforms being pushed in Washington, the head of LCH.Clearnet, Europe’s largest independently-owned clearing house, has warned.
Roger Liddell, LCH.Clearnet chief executive, said that in contrast to the level of activity in on-exchange futures contracts, there was far less trading in OTC interest rate swaps, which have become a key battleground as clearing houses start to compete to attract clearing of such contracts. The so-called Dodd-Frank act, passed by the US administration in June, requires that as many “standardized” OTC derivatives as possible be processed through clearing houses and that they be traded on exchanges or SEFS.
While the notional amount of OTC swaps traded between dealers already cleared at LCH.Clearnet was large, the London-based clearer received only about 800 interest rate swaps contracts a day, Mr Liddell told a panel at the Futures Industry Association’s annual expo in Chicago.
While the exact definition of a SEF has yet to be decided by US regulators, many types of market participants – OTC dealers and even exchanges – are expected to set them up. CME Group, the largest US futures exchange, has said it “reserves the right to set up a SEF at some point in the future”. ELX, a small bank-owned futures exchange that competes with CME, also last week said it may set up a SEF.
Mr Liddell said: “I think that what may happen is that these SEFs will be switched on and not much may happen. To move from [the current] market to one that behaves like a futures market is a massive change and one that will only happen over time.”
Speaking to FT Trading Room later, he added: “The issue is, when you switch on your SEF, what’s the chance that someone will be on the other side of the trade? The market doesn’t do that many trades now. It’s completely different to the [exchange-traded] futures markets where you have millions of trades a day. It’s not a deep, liquid market today.”
Industry participants have become concerned that the existence of too many trading platforms could unnecessarily divide liquidity across multiple platforms, a feature of the equity markets that has come under scrutiny as the Securities and Exchange Commission studies US market structures in the wake of the “flash crash” in May.
Garry O’Connor, chief executive of International Derivatives Clearing Group, a new OTC interest rate swaps clearer majority-owned by Nasdaq OMX, said: “We are concerned about a proliferation of SEFs and what that could do to fragmentation of liquidity.”
Separately, Mr Liddell said LCH.Clearnet was likely to launch clearing of OTC interest rate swaps traded by so-called “buyside” market participants – such as hedge funds, asset managers, and Fannie Mae and Freddie Mac, the government sponsored mortgage lenders – by the end of the year.
LCH.Clearnet is waiting for approval from the Commodity Futures Trading Commission, the US futures regulator, to be able to launch the service for US clients from its base in London, with CFTC oversight.
“I think we’re pretty much there in terms of all the technical requirements. What they will approve is an extension of the CFTC regime to cover the interest rate swap product,” Mr Liddell said.
November 8 (The Financial Times)
Trading activity in key over-the-counter (OTC) derivatives markets is too thin to support the anticipated proliferation of OTC trading platforms – known as “swap execution facilities” (SEF) – as a result of reforms being pushed in Washington, the head of LCH.Clearnet, Europe’s largest independently-owned clearing house, has warned.
Roger Liddell, LCH.Clearnet chief executive, said that in contrast to the level of activity in on-exchange futures contracts, there was far less trading in OTC interest rate swaps, which have become a key battleground as clearing houses start to compete to attract clearing of such contracts. The so-called Dodd-Frank act, passed by the US administration in June, requires that as many “standardized” OTC derivatives as possible be processed through clearing houses and that they be traded on exchanges or SEFS.
While the notional amount of OTC swaps traded between dealers already cleared at LCH.Clearnet was large, the London-based clearer received only about 800 interest rate swaps contracts a day, Mr Liddell told a panel at the Futures Industry Association’s annual expo in Chicago.
While the exact definition of a SEF has yet to be decided by US regulators, many types of market participants – OTC dealers and even exchanges – are expected to set them up. CME Group, the largest US futures exchange, has said it “reserves the right to set up a SEF at some point in the future”. ELX, a small bank-owned futures exchange that competes with CME, also last week said it may set up a SEF.
Mr Liddell said: “I think that what may happen is that these SEFs will be switched on and not much may happen. To move from [the current] market to one that behaves like a futures market is a massive change and one that will only happen over time.”
Speaking to FT Trading Room later, he added: “The issue is, when you switch on your SEF, what’s the chance that someone will be on the other side of the trade? The market doesn’t do that many trades now. It’s completely different to the [exchange-traded] futures markets where you have millions of trades a day. It’s not a deep, liquid market today.”
Industry participants have become concerned that the existence of too many trading platforms could unnecessarily divide liquidity across multiple platforms, a feature of the equity markets that has come under scrutiny as the Securities and Exchange Commission studies US market structures in the wake of the “flash crash” in May.
Garry O’Connor, chief executive of International Derivatives Clearing Group, a new OTC interest rate swaps clearer majority-owned by Nasdaq OMX, said: “We are concerned about a proliferation of SEFs and what that could do to fragmentation of liquidity.”
Separately, Mr Liddell said LCH.Clearnet was likely to launch clearing of OTC interest rate swaps traded by so-called “buyside” market participants – such as hedge funds, asset managers, and Fannie Mae and Freddie Mac, the government sponsored mortgage lenders – by the end of the year.
LCH.Clearnet is waiting for approval from the Commodity Futures Trading Commission, the US futures regulator, to be able to launch the service for US clients from its base in London, with CFTC oversight.
“I think we’re pretty much there in terms of all the technical requirements. What they will approve is an extension of the CFTC regime to cover the interest rate swap product,” Mr Liddell said.
