Sponsored Access Model: To Build or Not To Build

by Joséphine de Chazournes, May 28, 2014
Global

Abstract

Legacy and ecosystem transformation is forcing market participants to revisit their business models, to innovate, and to use emerging technologies. One business model that Celent believes has legs is the sponsored access model, which trading platforms can offer the buy side via their sponsoring banks.

In the report Sponsored Access Model: To Build or Not To Build, Celent analyzes the drivers of sponsored access and which products the buy side might find valid.

A myriad of regulation is driving banks, platforms, and buy side firms to consider sponsored access: the push towards agency trading coming from Basel III, Volcker, Vickers, and Liikanen rules and regulations; the push towards OTC derivatives control from the Dodd-Frank Act and the European Market Infrastructure Regulation (EMIR); and the push towards transparency across the globe and especially with the Markets in Financial Instruments Directive II (MiFID II) in Europe.

Technology breaks vertical and horizontal silos within organizations to cut costs and increase returns, but it also allows firms to change position within the value chain and potentially compete with their suppliers. Sponsored access is an intermediate adaptation to changing market structure.

In OTC derivatives, the swap execution facility (SEF) tornado has brought many new trading platforms to choose from, and in cash fixed income the electronic secular trend is fragmenting liquidity. Sponsored access could enable banks to concentrate that liquidity for the buy side and reduce the cost of trading via technology without overhauling their operations, risk management, compliance, and reporting.

We see asset-agnostic hedge funds and algorithmic asset managers as potential additional market participants that would use sponsored access models for homogeneous products that have continuous liquidity and trade on a central limit order book (CLOB). Traditional asset managers will focus their efforts more on interest rate swaps and will probably prefer to gain access to more traditional protocols such as request for quote, because RFQ would not be as disruptive to their trading management.

“The buy side represents 58% of global OTC IRS turnover, so the sponsored access model is a diplomatic way for interdealer brokers to gain access to the buy side without cutting out the middleman,” says Joséphine de Chazournes, Senior Analyst with Celent’s Securities & Investments Group and author of the report.

In this report Celent also provides an update on the IDB, D2C, and IDB2C trading models across fixed income and FX and cash and derivatives.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

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Michele Pace
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Europe (London)
Chris Williams
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Table of Contents

Executive Summary

1

Introduction

2

Drivers of Sponsored Access

3

 

The Regulatory Push Towards Agency Trading

3

 

The Regulatory Push Towards Derivatives Control

4

 

The Regulatory Push Towards Transparency

5

 

Innovation and Emerging Technologies

6

 

Cut Out the Middleman

7

Platform Segmentation

8

 

Rates

8

 

Credit

9

 

FX

10

Sponsored Access

12

 

Force Multiplier

12

 

Client Comes First

12

 

Who Creates the Link?

15

Conclusion

16

Leveraging Celent’s Expertise

17

 

Support for Financial Institutions

17

 

Support for Vendors

17

Related Celent Research

18

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