Swap execution facilities have been meandering along for three years now, most of the nonincumbents dropping by the wayside, volume in the doldrums for over a year, and … boom! By the end of Q4 2016, this market is finally starting to get spicy:
- On the heels of Brexit becoming very real in the European Union and Trump having a surprise victory, U.S. interest rates unmistakably bottomed late in 2016 with the Fed hiking rates 0.25% in December and promising more to come—finally rising rates helped drive IRS volume up 25% year over year.
- Tullett Prebon closed its acquisition of ICAP’s broking business to form TP ICAP, and suddenly 60% of SEF business is controlled by the combined company, and the regulators are OK with that.
- ICAP founder Michael Spencer split the nonbroking parts of ICAP off to form Nex Group as a new trading platform business and has a pending registration for Nex SEF initially trading NDFs.
- Bats acquired the remnants of SEF pioneer Javelin, rebranded it as Hotspot SEF to go along with the Hotspot FX ECN it acquired in 2015, and the Chicago Board Options Exchange is about to acquire the whole thing.
- BGC acquired GFI earlier in 2016 and is now serving up the clash of the interdealer broker titans in 2017 as they go head to head with TP ICAP, while Tradition is the (distant) third and last major IDB standing.
- Tradeweb’s SEF business finally snapped awake, growing 33% in 2016, while trueEX, the last SEF startup standing, steadily chugged along, growing 9% in 2016.
- Without any FX trading mandate, and none foreseen, FX SEFs driven mainly by organic non-deliverable forward business grew 9% in 2016.
At long last, SEFs seem to be showing a strong pulse, and then some, while still being at least a year ahead of any EU trading mandate on OTFs. Hey EU, nine years after the 2009 G-20 Pittsburgh agreements, better late than never to catch up with the U.S. and Japan (and it’s not like the Securities and Exchange Commission is going to beat you to it).
Will the Trump administration trash this sudden market progress with its much flaunted intention to overhaul and gut the Dodd-Frank Act? Well probably not Title VII, maybe at most tweaking RFQ and trading mandates. Quite the contrary—the anticipated Trump-related domestic volatility and global friction will only serve to drive SEF volumes higher.
At long last, three years after the SEF trading mandate went into effect, SEFs finally seem to be getting their sea legs. SEF doldrums be gone: Strap in, as 2017 appears set to be a bumpy OTC derivatives ride.
For more on SEFs' performance in Q4 2016 and the year overall, see my report Swap Execution Facilities Review: Q4 2016 and 2016 Annual Update or view the brief webcast below.