Fitch: New U.S. Swap Platforms to Support Pricing Transparency
CHICAGO -- September 26, 2013
New derivatives trading platforms receiving temporary U.S. regulatory approval
for launch are likely to improve pricing transparency for traders of interest
rate swaps and other credit derivatives, according to Fitch Ratings.
Designated swaps execution facilities (SEFs) could, over time, begin to
generate meaningful revenue streams for firms offering voice and electronic
execution of derivative transactions, as required under Dodd-Frank.
However, we believe that in the near term, regulatory uncertainty around SEF
rules, namely definition of 'required' and 'permitted' transaction and
cross-border treatment, could dampen liquidity, affecting volumes and
SEFs will provide an electronic trading platform for counterparties that are
required to move all standardized over the counter (OTC) derivative
transactions onto centrally cleared platforms. We see this as an important
step in allowing swap participants to more easily gain access to pricing data.
This should ultimately contribute to more efficient interest rate swap and CDS
As of Sept. 25, a total of 18 institutions submitted applications to the
Commodity Futures Trading Commission (CFTC) to operate SEFs. So far, 13 firms
have received temporary registration approval. Included among these are BGC
Partners Inc. and GFI Group Inc, two Fitch-rated inter-dealer brokers (IDBs).
Bloomberg was the first organization to gain temporary approval as an SEF
operator in July.
CFTC Chairman Gary Gensler noted at a conference last week that applications
by prospective SEFs were receiving only "cursory" reviews, suggesting that
more participants are likely to emerge before the Oct. 2 application deadline.
Given the relatively large number of prospective competitors in the SEF space,
Fitch believes the SEFs that attract the most liquidity and are dominant in a
specific asset class will gain market share over time. For some smaller IDBs,
high regulatory and operational cost hurdles may have discouraged entry and
could lead to industry consolidation.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Tara Kriss, +1-212-908-0369
Mohak Rao, CFA
Bill Warlick, +1-312-368-3141
70 W. Madison
Chicago, IL 60602
Brian Bertsch, +1-212-908-0549
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