Dealers and Sefs divided over sponsored access

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From today, swap users have to trade on one of the over-the-counter market's new platforms when executing certain interest rate swaps under US rules, but they don't necessarily need to execute in their own name. The arrival last week of so-called sponsored access trading at Bloomberg and Tradeweb – in which a client can trade via a dealer's account – sparked a flurry of coverage. It also sparked a debate about whether the concept has a future.

Supporters including Credit Suisse and UBS argue that with 13 swap execution facilities (Sefs) open for business in products covered by the Sef-trading mandate, clients do not have the time to register with each of the platforms in order to access the market's best prices and full liquidity. Viewed this way, sponsored access is a kind of aggregation service. Sceptics, though, claim there will be no difference in price from one platform to the next and say only two or three will have any real dealer-to-client volume, so clients may as well connect directly.

"We are more sceptical about sponsored access than some of our competitors. If many Sefs survive then it may be helpful to have aggregation services, but equally if only two platforms have all the liquidity in a given asset class why would a fund not just come and request-for-quote (RFQ) directly and execute for itself? It saves on the dealer's fees if nothing else," says one New York-based in-house counsel at a US swap dealer.

Since clearing is a prerequisite for all Sef-mandated trades, the counsel argues counterparty risk will no longer be a differentiator, and all clients will be quoted the same price, regardless of the platform.

"RFQ three dealers and you are going to get the same price regardless of which Sef you put that enquiry through. Our shop will not be giving different prices for the same enquiry, so we don't think there is a lot of sense behind aggregation for RFQ," he says.

Sponsored access supporters say that's not true – prices can and do differ for a number of reasons, including the fees charged by the Sefs themselves.

"One Sef might charge a dealer more than another to display their prices, in which case the dealer would post a wider spread on that platform. Uniform pricing is not the case today and it has never been the case," says Grigorios Reppas, credit default swap product manager at MarketAxess in New York.

The US bank counsel concedes that sponsored access may work for Sefs running central limit order books (Clobs), where the best bids and offers are matched automatically. So far, Clobs have been limited to dealer participants due to a Commodity Futures Trading Commission rule that clearing credit limit checks be carried out before a trade can be completed. The time taken for end-user credit checks was too long for Clobs to function effectively, and clearing members avoided pushing clients' credit limits onto Sefs as it splits the end-user's available clearing capacity.

"It might work for Clobs but only if they are anonymous, there are enough of them and the liquidity within them is sourced from sufficiently different providers – only then might it be worthwhile," says the counsel.

Other sponsored access supporters say the process is also simply a way to overcome buy-side concerns about connecting directly to the fledgling platforms – the last nine months have seen regular bouts of confusion and outrage about what is required of the platforms and their clients in terms of documentation, and some of those requirements are still being thrashed out. For non-cleared trades, for example, Sefs were told in January that they would need to collect and store paper copies of participants' bilateral derivatives master agreements.

"The buy side is realising what it means to sign rule books to participate on a Sef and the technical complexity of being on those platforms. I think that has pushed a large number of asset managers to look at the sponsored access solution," says Ryan Sheftel, global head of electronic market-making for rates at Credit Suisse in New York.

"I think clients are, generally speaking, anxious about their direct relationships with these Sefs, so the interest from clients to provide an agency sponsor is clear," he adds.

GFI Group announced in November 2013 that it would provide sponsored access capability to UBS and Credit Suisse, while on February 12, Bloomberg announced that Nisa Investment Managers had routed the first sponsored access trade on its Sef through Credit Suisse. The next day, Tradeweb announced the first sponsored trade on its platform, a transaction on behalf of an undisclosed asset manager that also executed through Credit Suisse.

Beyond these three Sefs, however, no other trading venue has confirmed the completion of any sponsored trades. Even the platforms that are embracing the functionality are measured in their support of the process.

"For some time, we have been considering an offering that supports sponsored access and on-behalf-of trading. Of course, there are still questions about how much client demand there will be for such a service. In fact, we already have many clients that prefer to connect to us directly – we currently have about 200 such arrangements in place," says Lee Olesky, chief executive of Tradeweb in New York.

Olesky says that for sponsored access to take off, banks will have to do more than simply assist their clients when putting trades into the market. "They will need to add value to market participants that use that service, otherwise it is likely clients will do it for themselves over time. Unless there is something else of value to the client, they will quickly move on to a more efficient process," he says.

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