Swap Execution Facilities and Organised Trading Facilities

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30 November 2011

A New Market Structure Emerges


Trade execution on swap execution facilities (SEFs) and organised trading facilities (OTFs) is the future state of a massive reorganization of the swaps market structure based on the Dodd-Frank Act and MiFID II/MiFIR. Much is still theoretical, but we are moving closer to that reality. The future state can be reached by several divergent paths, but one path stands out.

In a new report, Swap Execution Facilities and Organised Trading Facilities: A New Market Structure Emerges, Celent offers key insights into the likely future direction of SEF/OTF markets and critical factors setting this direction. Based on these insights, Celent believes that there are multiple scenarios for the market structure to reach the SEF/OTF future state. However, because of fragile liquidity, industry feedback, and cautious regulators, a dominant scenario emerges as the most likely outcome.

For dealers and users, 2012 is likely to be choppy in and around SEF/OTF markets as participants try to get more comfortable with the idea of greater transparency and electronic execution on SEFs/OTFs. For operators, firms must come to grips with the notion that SEF/OTF status is a rite of passage, not a guarantee of success. Some SEFs/OTFs will attract liquidity; others will not. Furthermore, liquidity in the broader swaps market will ultimately be determined by how final regulatory rules are written, interpreted, implemented, and enforced.

“Overall, while we do believe that SEFs/OTFs will make the swaps market more electronic, transparent, and competitive, not all transparency is equal.” says David Easthope, Research Director with Celent’s Capital Markets Group and author of the report. “We especially believe price discovery could be hindered unless careful consideration is taken to make the rules adaptable and to reflect the fact that the swaps market is less liquid than some people imagine.”