Swap Execution Facilities and Organised Trading Facilities
Trade execution on swap execution facilities (SEFs) and organised trading facilities (OTFs) is the future state of a massive reorganization of the swaps market structure based on the Dodd-Frank Act and MiFID II/MiFIR. Much is still theoretical, but we are moving closer to that reality. The future state can be reached by several divergent paths, but one path stands out.
In a new report, Swap Execution Facilities and Organised Trading Facilities: A New Market Structure Emerges, Celent offers key insights into the likely future direction of SEF/OTF markets and critical factors setting this direction. Based on these insights, Celent believes that there are multiple scenarios for the market structure to reach the SEF/OTF future state. However, because of fragile liquidity, industry feedback, and cautious regulators, a dominant scenario emerges as the most likely outcome.
For dealers and users, 2012 is likely to be choppy in and around SEF/OTF markets as participants try to get more comfortable with the idea of greater transparency and electronic execution on SEFs/OTFs. For operators, firms must come to grips with the notion that SEF/OTF status is a rite of passage, not a guarantee of success. Some SEFs/OTFs will attract liquidity; others will not. Furthermore, liquidity in the broader swaps market will ultimately be determined by how final regulatory rules are written, interpreted, implemented, and enforced.
“Overall, while we do believe that SEFs/OTFs will make the swaps market more electronic, transparent, and competitive, not all transparency is equal.” says David Easthope, Research Director with Celent’s Capital Markets Group and author of the report. “We especially believe price discovery could be hindered unless careful consideration is taken to make the rules adaptable and to reflect the fact that the swaps market is less liquid than some people imagine.”
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].
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Table of Contents
Intentions and Realities
Dodd-Frank and MiFID II/MiFIR: Effect on the Swaps Market
Overview of the Dodd-Frank Act
Overview of EMIR
A New Market Structure to Evolve
Timing the US and Europe
A Comparison of SEF and OTF Rules and Practices
Governance and Membership
Prediction: Existing Execution Mechanisms Will Become the Primary SEFs/OTFs
Expected Developments in Market Structure
The Marathon Scenario: Market Structure Impact
Critical Factors in the Evolution of the Market Structure
An Unwelcome Scenario Where Nobody Wins
Getting Price Discovery Right
Getting the Trade Lifecycle Right
Getting Profitability Right
Players in the SEF/OTF Markets
The Two-Tier Market
Potential for Many Different SEFs/OTFs by Asset Class
To Build or Not to Build?
Considerations for Potential Market Operators
Considerations for IT Vendors
For Users and Dealers
For SEF/OTF Operators
Leveraging Celent’s Expertise
Support for Financial Institutions
Support for Vendors
Related Celent Research