The WMBA Americas hosted SEFCON V on November 12, 2014, and John Lothian News was there. We interviewed 14 SEF operators, regulators and participants and put together this three part series on the state of SEFs one year into the mandate.
Part I looks at the state of innovation in SEF technology and market structure. The creation of the swap execution facility really forced a collision of the bilateral and listed worlds, and necessitated an entirely new workflow. Some of the technology is still being invented. Furthermore, the need for capital efficiency and product standardization have led to new product design.
“Technology is the great enabler,” says Francesco Cicero, the head of e-trading for GFI Group, one of the host firms of SEFCON. “We are definitely going into a world with more adoption of electronic trading systems.” Traiana’s Nick Solinger adds, “There was a lot of build that had to go on, and we will know the market is maturing when we go from daily and weekly software releases to monthly or quarterly, and I think we have achieved that.”
One innovation that is bridging the transition from RFQ to order book execution is the Market Agreed Coupon, or MAC swap, developed by ISDA and Sifma. According to Henry Ann, head of rates for the GFI Swaps Exchange, MACs are increasing in popularity, due to the standardization of terms such as start date, which eliminates the need for portfolio compression.
Though we have come a long way since the first SEFCON in 2010, innovation will continue to drive the SEF market in 2015 and beyond. Up next, says Anthony Perrotta, head of fixed income research for TABB Group, is a centralized and standardized SEF trading infrastructure that “will allow trading in multiple SEFs or with multiple trading protocols.”
“Three or four years from now,” says Cicero, “the world will look a lot more interconnected. There will be fewer SEFs around, but it will be a lot more efficient.”