Tullett Prebon has on-boarded the vast majority of the market participants who previously executed swaps in the inter-dealer market to its swap execution facility, where market participants can continue to execute swaps, albeit via the registered facility as opposed to the inter-dealer brokering entity.
“Prior to Dodd-Frank, all of these products were being traded through the inter-dealer market,” said Shawn Bernardo, chief executive of Tullett’s SEF, tpSEF. “Dodd-Frank and the implementing regulations now require the majority of these products be executed on a SEF.”
Bernardo, who is responsible for all electronic trading in North America for Tullett Prebon, and is a founding board member of the Wholesale Market Brokers Association for Tullett, will speak at Markets Media’s Chicago Trading & Investing Summit on Sept. 23.
Futures exchanges see an opportunity to try to convert OTC products that were traded in the inter-dealer market into the futures market. While there are certain margining advantages with trading in futures as opposed to a swap, futures cannot be customized and, as a result, often fail to meet specific client needs, according to Bernardo.
“I don’t think that has changed much for the futures exchanges,” he said. “I’m sure that the futures exchanges would like to increase the number of products as well as their volumes, which is exactly what Tullett would like in the OTC markets. I think there's a happy medium between both swaps and futures. Both serve a purpose for the client base.”
Clients who are not direct clearing members and want direct access to a SEF are going to need to have credit provided to them by an Futures Commission Merchant.
“I don’t think this is new business (for the FCMs), I would consider it additive,” Bernardo said. “The business that may go through the FCM could go directly to the SEF, bypassing the dealer trading desk, if that's how the client wants to transact.”
Instead, institutions are weighing the pros and cons of the SEF operating models before deciding where to execute. “A number of people thought that the buy-side clients were going to look for immediate direct access to the SEFs,” said Bernardo. “The difficulty is that there are over 20 temporarily registered SEFs. All of the firms have a limited number of resources and I think the buy-side clients are waiting to see who the clear winners are before they connect to a SEF.”
Liquidity will be the driving force to connect directly to a SEF. “It seems that the vast majority of the buy side are satisfied with the pre-existing business models,” Bernardo said, “which may be why they are not actively looking to connect directly to the more order book oriented SEFs at this time.”
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