By Mike Kentz
A regulatory struggle to transform the trading infrastructure for over-the-counter swaps may be on the cusp of a big leap towards the exchange-like regime envisioned under Dodd-Frank regulations. Several segments of the market are poised to coalesce around a new standardised swaps contract – known as a Market-Agreed Coupon or “MAC” swap – within an order book framework that more closely resembles exchange trading.
GFI Group, an inter-dealer broker and swap execution facility operator, is set to introduce MAC trading on a central limit order book (or CLOB) with a set of dedicated liquidity providers in the next two weeks, according to sources. Javelin Capital Markets, another SEF, expects to introduce a similar offering by year-end.
The addition of two players would be a boost to a service currently provided by trueEx, the first SEF to list real liquidity on MACs within an order book. That liquidity will be accessible through UBS’s Neo agency execution platform, a facility that enables clients to view liquidity across a number of platforms at once.
Credit Suisse is set to offer agency execution access to each of the SEF order books, but also plans to offer algorithmic trading strategies to clients for MAC swaps by the end of the year.
The developments could finally calm some of the recent controversy surrounding order book trading of swaps. US politicians, regulators, and buyside swaps users have all pushed to move trading of OTC products into an exchange-like format for several years. However, dealers and entrenched platform providers have put up roadblocks to the change, such as refusing to provide fully anonymous order book trading by requiring firms to give up their identities following the completion of a trade.
“The buyside is asking for a more level playing field, but dealers are pointing out that the format they are requesting wouldn’t be fair either – in [dealers’] opinion the buyside is trying to have its cake and eat it too,” said one inter-dealer broker executive.
The stalled developments have frustrated many, but the MAC contract is viewed as a possible bridge between the two sides due to its standardised nature that more closely resembles a futures contract. The move to an order book would also be expected to bring more efficient pricing conventions that may entice additional liquidity.
“I think any time a market migrates to CLOB style of trading it is not going to happen in big chunks, you’re going to see things change incrementally,” said John Dabbs, US head of listed derivatives and OTC clearing at Credit Suisse.
“The MAC contract offers that incremental change where buyside and sellside can meet in an order book format without fear of cutting too deep into the existing market structure.”
MAC swaps already list and trade on platforms such as Bloomberg and Tradeweb, but only through an electronic request-for-quote format.
The e-RFQ format is essentially an electronification of the traditional voice format, and one that only marginally satisfies the goals of Dodd-Frank reform, according to participants and regulators themselves.
The idea of MACs trading on order books has long been floated as a solution to the buyside versus sellside struggle, but until recently platforms and dealers appeared hesitant to commit.
However, volumes in MAC contracts spiked in September from less than 5% of overall trade count across the SEF market to almost 20% of activity, according to data compiled by financial technology provider ClarusFT.
Market participants say that SEF trading – MAC or otherwise – has not migrated to the order book due to the absence of liquidity providers. Providing liquidity to MAC contracts would be a first step to that change, they say.
Other platforms are understood to be building the MAC order book functionality as well, but remain non-committal for fear of disenfranchising existing dealer client bases.
“It’s not always best to be first-mover on something like this,” said one broker.