NEW YORK & LONDON--(BUSINESS WIRE)--The fate of swap execution facilities (SEFs) does not rest with the CFTC but with the SEFs themselves. According to projections from TABB Group, the current $350 million interdealer broker swaps execution revenue pool will decline between 43%, to $200 million, and 71%, to $100 million, depending on the outcome of voice-trading rules being set by the CFTC, perhaps on May 16.
With the interdealer brokerage industry under pressure, firms will be forced to develop their own strategies in the pursuit of profitability. “The question is which of the SEFs will rise to the occasion and emerge victorious, and which will be cast into oblivion?” says Will Rhode, a TABB principal, director of fixed income research and author of new research published today, “SEF Business Models: Zeroes or Heroes?”
Interdealer brokers have already responded to the SEF mandate by lobbying to defend the industry status quo, in particular the “by any means of interstate commerce” (read: voice) trade provision. But with so many forces working collectively against the status quo, from regulation to technology, this attempt to maintain the industry’s profitability as a whole will only result in collective obliteration, Rhode says.
Looking ahead, TABB believes SEFs will only be able to address six markets: US dollar-denominated interest rate swaps; CDX; US single-name CDS; energy swaps’, some commodity swaps like metals and some US-centric FX markets, once there’s more clarity on their clearing requirement. With the new SEF mandate there will be several impacts on the swaps market, including:
- Swaps market compression resulting from the cost of clearing
- Bid/ask spread compression
- Commission compression
- Turnover velocity
- Trade-size reduction
- Standardized terms for swaps
- Changes to commission structure
- Migration to futures
Once the transparent trading mandate is in place, Rhode explains, there will be a push toward standardization, which will make electronic execution easier, eroding the ability of voice trading to compete. With standardization, swaps will start to look more like futures, accelerating migration away from swaps and further reducing the overall swaps market size. He adds that standardization may also precede a change in commission structure, away from spreads and toward ticket fees, which will be vulnerable to undercutting by an agitator seeking market share.
In the end, however, he says, “One firm is going to go it alone seeking to deliver fresh execution efficiencies in a bid to win market share in the new trading world of SEFs. Given the right pricing model and the right combination of trade protocols - lower commissions, sponsored-access models, maker-taker pricing, or all-you-can-eat caps on execution fees – that firm is destined to win, even as others lose.”
The 14-page report with 13 exhibits is available for immediate download by TABB Group Research Alliance Fixed Income clients and pre-qualified media. For the Executive Summary or more information, visit www.tabbgroup.com. To purchase the report, write to info@tabbgroup.com.
About TABB Group
With offices in New York, London and expanding across the Asia-Pacific region, TABB Group is the financial industry’s only strategic advisory and research firm focused solely on capital markets, based on the proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb. For more information, visit www.tabbgroup.com. In January 2010, TABB launched TabbFORUM, the online global capital markets community covering peer-to-peer opinions and analyses on current industry issues, tracked daily by more than 15,000 industry professionals.
