SEFs Will Improve Global Swaps Market: Survey

By Justin Grant


A wide range of market participants believe swap execution facilities will improve the derivatives trading market, according to research conducted by Tabb Group.

In a survey of 140 market participants, including dealers, hedge funds, asset managers, exchange operators and clearinghouses, nearly all agree that SEFs would make the $600 trillion global swaps market more efficient. The rules governing the swaps market will most likely take effect during the first quarter of 2012, the survey found, even though Dodd-Frank requires most derivatives reforms to be in place by July.

And when those rules are eventually in place, 69 percent of those surveyed told Tabb the reduction of counterparty risk will be the clear winner. But the results revealed an undercurrent of skepticism over whether the new rules will eliminate systemic risk, with 40 percent saying they wouldn't.

"The fact that 40 percent of market participants didn't think that the creation of SEFs reduced systemic risk means that either Washington missed the mark, or SEFs are not a part of the systemic risk story at all," Tabb Group analyst Kevin McPartland wrote. "That's left to clearinghouses and repositories."

Nevertheless, derivatives trading volume is expected to surge once the rules are in place with new participants entering the market and existing participants ramping up trading, the survey found. However the research revealed a perception throughout the industry that SEFs will lead to tighter spreads and lower profit margins, forcing firms to move to a commission-based trading model.

"Half of the market believes that the way dealers profit from swaps trading will change when SEF trading (and) central clearing mandates arrive," McPartland wrote.