SEF Aggregation Addressed in New Research from GreySpark Partners

London - 26 September 2012

Liquidity access/provision identified as key issue for all market participants

Consultancy advises on SEF aggregation strategies

GreySpark Partners, the capital markets consultancy, today publishes the final report of a three part series on the Swap Execution Facility (SEF) landscape. This document outlines the impact on business and trading models as a result of the nascent SEF marketplace where it presents the pitfalls and solutions to consider for participants faced with increasingly fragmented liquidity.

SEFs are one of the primary mandates of the Dodd-Frank Act. They are required to increase pre-trade price transparency, post-trade trade transparency and minimise bilateral exposures between swaps counterparties. Under MiFID in Europe, multilateral trading facilities (MTFs) and organised trading facilities (OTFs) are expected to converge with SEFs from a regulatory standpoint.

GreySpark’s report entitled "SEF Aggregation: Approaches, Pitfalls and Solutions" focuses on the market participants and how their trading models must adapt cope with fragmented liquidity. For the sellside, building up SEF aggregation capabilities is essential either for their own usage as a liquidity taker or provider, or to allow their clients to access liquidity on their single dealer platforms (SDPs).

For traditional buyside participants, who are allowed to trade directly on SEFs under Dodd-Frank, a decision has to be made whether they set up their own market access and clearing infrastructures, or continue to use the services of a broker/dealer to access liquidity and/or clearing services.

In part one of this research series, GreySpark selected 12 leading SEFs from a list of 52, revealing how these SEFs have approached the regulatory scope of Dodd-Frank in terms of their proposed trading models and overall functionality within the five swaps asset classes. In part two, GreySpark looked at the technological aspects of these SEFs, including connectivity strategies.

Part three focuses on liquidity aggregation and execution management. It addresses a number of concerns which are particular to this market, including the question of how the quality of liquidity should be managed when tackling an aggregation and/or order routing project.

The paper presents these aggregation concerns from various perspectives, where it shows that the current wave of regulation presents both opportunities and threats for both new and incumbent participants.

Bradley Wood, partner at GreySpark Partners, commented, “In our final report on SEFs we wanted to present a practical assessment of the impact these regulations will have on the business franchises of our clients, both on the buy- and sellside. We believe that aggregating SEF liquidity is going to be a very important requirement in the next year or so, especially for sellside firms seeking to defend their existing swaps businesses. We are confident that this research will be invaluable to those firms who need to undertake such programmes of work.”

The research is a culmination of analysis on the capabilities of SEFs in the market. 52 proposed swap execution facilities were analysed, and the 12 strongest players interviewed. They were ranked by product coverage, volumes and current market share. 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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