With one year in the books, industry members discussed how technology has affected swap execution facilities (SEFs) and what to expect going forward.
Swap execution facilities (SEFs) have now been in place for a year, and it's becoming increasingly clear that while liquidity is king, technology has a crucial role to play, according to a panel of industry members that gathered to discuss SEF technology trends at the Sefcon V conference yesterday in New York, organized by the Wholesale Markets Brokers' Association Americas.
Chris Amen, managing director and head of US institutional rates markets for Tradeweb; Isaac Chang, global head of fixed income at KCG; John Dabbs, managing director of the investment banking division of Credit Suisse; Maged Hassan, global head of fixed income electronic trading technology of Morgan Stanley; and Ric Okun, executive vice president and senior manager of the technology department at the Pacific Investment Management Company (Pimco) were all part of the panel moderated by Henry Ann, head of rates at GFI Swaps Exchange.
Platform Not Key
The discussion opened with the panelists talking about whether the technology of a SEF platform can be a differentiator.
Chang said the importance of technology when it comes to SEF platforms is in the value it brings to risk management and being able to quote as tightly as possible.
According to Okun, while the infrastructure of a SEF platform matters when it comes to certain foundational components that are essential, it's not going to set one SEF apart from another.
"In terms of SEF platform technology being needle-moving in decision-making factors—whether we'd rather stick more closely to one SEF over another—is highly unlikely," Okun said. "There are a handful of bells and whistles that might make it a little more helpful or useful or user-experience-friendly for our portfolio management team. ... Basically, all the products are relatively suitable and highly competitive in that way."
Liquidity is the real driving factor for SEFs, as opposed to which technology a platform uses. Dabbs said that's the competitive edge a SEF can hold over another.
"I just don't think we've experienced enough to really say that any platform is better than another platform," Dabbs said.
What can be a differentiator, Hassan said, is having a standardized approach to onboarding a firm's front- and back-office systems. It's a problem that was caused by many SEFs rushing to make the deadline set by regulators without setting forth a plan for standardizing the process.
Integrating systems to all the different SEFs is expensive, and is driving up infrastructure spend, according to Hassan.
"The fact that we don't have a symbology that extends across every single SEF is a substantial problem to solve after everyone is live," Hassan said. "If we had solved this before we went live, then we would have known."
That being said, Okun said Pimco wants to be "SEF agnostic," seemingly trading with all 24 SEFs and going wherever the liquidity is. To do this, Okun said Pimco will leverage the workflows and messaging between the firm and central counterparties (CCPs) as opposed to having to do unique interactions with each SEF. It's a direction Okun said he believes the industry is heading.
The debate over request-for-quote (RFQ) trading versus central limit order book (CLOB) trading was also discussed. While some, like Amen, were strong believers in the RFQ model, others believed the two could coexist without one completely taking over for the other. Dabbs said CLOB could serve as a complement to RFQ in the future.
"I do think there is demand for anonymous trading, at least in terms of the group of clients we speak to," Dabbs said. "Not for all trades, and certainly not for large-block trades that they want to get done, but there are other people that want to trade throughout the day.
The Bottom Line
•In the early days of SEFs, platform technology has not been a differentiator for clients deciding which SEF to trade with. Liquidity remains the deciding factor.
•The fact there is no standardization across onboarding onto different SEFs is proving to be a costly problem, according to some.
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