SEF Connectivity Considerations Outlined by New Research from GreySpark

10 September 2012

In the second of a three part series on the Swap Execution Facility (SEF) landscape, GreySpark Partners, the capital markets consultancy, has revealed the technology considerations and challenges for businesses when they come to connect to these venues.

“SEFs: the Technology Landscape” predicts how the network connectivity for both the Buyside and Sellside with vendors is set to look and gives key recommendations for the on-boarding of SEFs into the connectivity infrastructure.

Under Dodd-Frank legislation, the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are responsible for OTC derivatives, demanding trading of swaps on exchanges or SEFs. While this regulation is set to improve market transparency, both the Buyside and Sellside will need to ensure connectivity is maintained or new lines are established, in order to retain their access to liquidity, ultimately retaining profitably during this transition. GreySpark’s report provides the guidance needed to make these assessments.

In part one of this research series, GreySpark splits SEFs into three key categories: the large, multi-asset venues; concentrated venues operating in a particular asset class; and lastly the smaller venues which may look to consolidate and strengthen offerings. They then go on to evaluate them, listing the most likely top 12 market leaders, based on product coverage, volumes, current market share and positioning.

Part two focuses on the technological aspects, such as the on-going “buy versus build” dilemma facing firms needing to evolve their technology quickly and makes recommendations including how to select a vendor. It also identifies other key considerations, such as which venues and technologies to consider for pre-trade risk management, the delivery of reference data and accessibility to post-trade reporting and clearing.

The report also presents the mix of FIX or native connectivity options that will be available for SEF connectivity. While many venues are aiming to utilise their existing connectivity APIs for their SEF launches, the trend is more towards a FIX protocol based interface. As a result, many SEFs are currently either offering or planning to support functions over a version of the FIX protocol.

Bradley Wood, Partner, GreySpark Partners, commented, “The Dodd-Frank legislation is pushing firms to connect to a new type of trading venue in order to protect or grow their franchises. We knew it was important to address how our clients are going to adjust from a technology perspective. This research explains the breadth of connectivity options available to SEF participants and provides guidance on how to build an actionable onboarding strategy for the major would-be SEFs.”

The research is a culmination of analysis on the capabilities of SEFs in the market, ranked by product coverage, volumes and current market share, and accompanied by commentary on observations and trends identified. The series is comprised of three parts: SEFs: the Business Landscape, SEFs: the Technology Landscape, and SEF Aggregation: Approaches, Pitfalls and Solutions.

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