Swap Execution Facilities: Opportunities in the Institutional Marketplace

by David Easthope, March 22, 2012
Industry Trends
EMEA, North America

Abstract

Although still theoretical, swap execution facilities (SEFs) are almost a reality. By late 2012 or early 2013, SEFs will be the required location for electronic execution of centrally cleared, standardized swaps under Title VII of Dodd-Frank. SEFs will be a critical component of the evolution of the swaps market structure from nonstandardized, bilaterally cleared to standardized, electronically traded, centrally cleared swaps.

In a new report, Swap Execution Facilities: Opportunities in the Institutional Marketplace, Celent offers key insights into the core building blocks of what it takes to become a SEF, including SEF evolution and roadmaps. The report also offers a scenario for the future lifecycle of SEFs and opportunities and challenges for multidealer platforms operating as SEFs and dealers interacting with SEFs.

Achieving SEF status and operating as an actual SEF goes beyond registration and enhancements to platforms such as connectivity and clearing. Achieving SEF status is also a sequencing problem, as the timing of rules and registration must be synchronized with development. Furthermore, a prioritized development roadmap will deliver not only integration but also innovation.

At the same time, industry adoption will not necessarily follow SEF innovation. Even the most innovative SEF models must still capture the imagination and liquidity of large institutional players on the buy and sell sides. This is no simple task and goes beyond offering new trading protocols, as the success of trading protocols will be determined by the liquidity needs of market participants.

“Achieving SEF status will be significant, but it is only a rite of passage, not a guarantee of success,” says David Easthope, Research Director with Celent’s Securities & Investments group and author of the report. “The road ahead will be challenging and will take a significant and continuous commitment of resources.”

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

3

Introduction

5

SEFs Finally Come of Age (Or, How I Learned to Stop Worrying and Love the CFTC)

8

 

SEFs Come into View

8

 

The SEF Roadmap

10

SEF Impact on Electronic Trading (Or, If You Build It, Will They Come?)

14

Swaps Market Structure

20

Impact on Dealers

25

Conclusions

28

Leveraging Celent’s Expertise

29

 

Support for Financial Institutions

29

 

Support for Vendors

29

Related Celent Research

30

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