Swap Execution Facilities: Taking the Next Step

Over the past year, US regulatory requirements regarding SEFs were clarified, which should have allowed the capital markets industry to engage with connectivity and aggregation. This engagement has not occurred with any great momentum, and though some participants are making preparations for the advent of a new trading landscape, the general pace of change is sluggish and haphazard. SEF aggregators are both pertinent and imminent as banks are required to connect with SEFs, and their clients, in turn, will request multiple connections. This report lays out the functional requirements for a reference SEF aggregator solution.

The shortfall across banks and third-party technology providers gives rise to the potential for first-mover advantages in the SEF aggregation space. There is definite potential among technology vendors to develop a comprehensive, valuable offering targeting SEF aggregation, and, among buyside firms and sellside firms, to develop these capabilities in-house.

From industry interviews GreySpark ascertained that there is no great cost barrier to implementing SEF aggregation functionality. There are varying degrees of functionality across potential solutions, from basic to complex. With costs increasing in line with the complexity of the solution, cost concerns are therefore discounted as a contributing factor. Additionally, there is no expectation that the technology concerned will have a short shelf life.

At one point as many as fifty SEFs were expected to emerge once the US CFTC completed its rules-making process. However, following the initial CFTC deadline for SEF registration, the number of registered SEFs stands at 21 – as of December 2013. Given the current lower-than-expected number of SEFs, it is unlikely that liquidity fragmentation across the venues, for now, will be as extensive as previously envisaged.