Sponsored Access Model: To Build or Not To Build

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27 May 2014


Legacy and ecosystem transformation is forcing market participants to revisit their business models, to innovate, and to use emerging technologies. One business model that Celent believes has legs is the sponsored access model, which trading platforms can offer the buy side via their sponsoring banks.

In the report Sponsored Access Model: To Build or Not To Build, Celent analyzes the drivers of sponsored access and which products the buy side might find valid.

A myriad of regulation is driving banks, platforms, and buy side firms to consider sponsored access: the push towards agency trading coming from Basel III, Volcker, Vickers, and Liikanen rules and regulations; the push towards OTC derivatives control from the Dodd-Frank Act and the European Market Infrastructure Regulation (EMIR); and the push towards transparency across the globe and especially with the Markets in Financial Instruments Directive II (MiFID II) in Europe.

Technology breaks vertical and horizontal silos within organizations to cut costs and increase returns, but it also allows firms to change position within the value chain and potentially compete with their suppliers. Sponsored access is an intermediate adaptation to changing market structure.

In OTC derivatives, the swap execution facility (SEF) tornado has brought many new trading platforms to choose from, and in cash fixed income the electronic secular trend is fragmenting liquidity. Sponsored access could enable banks to concentrate that liquidity for the buy side and reduce the cost of trading via technology without overhauling their operations, risk management, compliance, and reporting.

We see asset-agnostic hedge funds and algorithmic asset managers as potential additional market participants that would use sponsored access models for homogeneous products that have continuous liquidity and trade on a central limit order book (CLOB). Traditional asset managers will focus their efforts more on interest rate swaps and will probably prefer to gain access to more traditional protocols such as request for quote, because RFQ would not be as disruptive to their trading management.

“The buy side represents 58% of global OTC IRS turnover, so the sponsored access model is a diplomatic way for interdealer brokers to gain access to the buy side without cutting out the middleman,” says Joséphine de Chazournes, Senior Analyst with Celent’s Securities & Investments Group and author of the report.

In this report Celent also provides an update on the IDB, D2C, and IDB2C trading models across fixed income and FX and cash and derivatives.