Swaps Shift Sees Quiet Start as Tabb Says Most Users Wait

Most money managers that use swaps didn’t trade on new government-mandated platforms yesterday because use of the systems remains voluntary, according to a poll conducted by Tabb Group LLC.

The Boston-based researcher and consultant asked 36 investment firms that collectively manage more than $6 trillion if they used swap-execution facilities yesterday, when the U.S. Commodity Futures Trading Commission required the venues to open, according to a report. Seventy-seven percent said they didn’t use a SEF, 14 percent said they did, and 9 percent said they only sent test trades, Tabb said.

“The swaps market was largely unaffected, with volumes steady, despite the mad scramble to fix technology glitches and smooth the process,” according to the Tabb report. “Firms are still trading swaps, and there will be only a limited migration to swap futures in this uncertain transition.”

While the CFTC required all SEFs to be compliant with its rules by yesterday, investors aren’t yet required to use them. Mandatory trading will begin for certain swaps once the CFTC approves the list of contracts -- known as made-available-to-trade requests -- each SEF wants to offer. That’s keeping most of the industry away, according to Tabb.

“More than three-quarters of the firms polled said they plan to start SEF trading in the four months from November 2013 to February 2014, as both the Made Available to Trade Rule and the mandatory trading requirement kick in across the last two months of 2013,” Tabb said in the report.

2008 Crisis

The Dodd-Frank Act of 2010 has provisions designed to move swaps, which helped fuel the 2008 credit crisis, from largely unregulated trading negotiated off exchanges to more transparent systems including SEFs, which are overseen by the CFTC and U.S. Securities and Exchange Commission. The CFTC completed rules governing the transactions in May, opening up competition in a market with $633 trillion of over-the-counter derivatives contracts outstanding.

“We’re basically voice trading today, we’re not trading on SEFs,” Supurna VedBrat, co-head of market structure and electronic trading at BlackRock Inc., said in an interview yesterday. She said the firm would begin using the venues once it was mandatory.

There are still some kinks to work out, she said. The ability for all SEFs to perform pre-trade credit checks and for clearinghouses to split one cleared trade into smaller chunks that are then allocated to the many accounts under management by a firm such as BlackRock aren’t in place, she said.

‘Aren’t Ready’

“Those pieces of the infrastructure aren’t ready, so it becomes problematic to trade on a SEF if you are trading for a real-money account,” she said.

Lobbyists representing swaps users asked the CFTC last week for a broad postponement of yesterday’s deadline for when SEFs had to be ready for trading, according to letters they sent the regulator. The CFTC granted several temporary delays related to the data-reporting and enforcement responsibilities of the SEFs while denying the broad request.

Seventeen SEFs have won temporary requests to operate, including venues from Bloomberg News parent Bloomberg LP, IntercontinentalExchange Inc., Thomson Reuters Corp., MarketAxess Holdings Inc., GFI Group Inc., ICAP Plc, Tradeweb Markets LLC, and Javelin Capital Markets LLC.

ICAP is accepting trades put together by brokers that are then executed on the company’s SEF, said Chris Ferreri, a managing director. “It’s a good transition step,” he said. “If you walked onto our brokering floor, you’d think it was a pretty normal day.”