Bloomberg and UBS clash over Sef aggregation

UBS claims users of its Neo platform are being blocked from trading on Bloomberg's Sef; Bloomberg questions value of aggregation

UBS offices in New York

Bloomberg and UBS clashed yesterday over attempts by the Swiss bank to provide clients of its Neo trading platform with access to Bloomberg's swap execution facility (Sef) – with UBS claiming that Bloomberg is refusing to support the introducing broker service on its execution venue.

The dirty linen was aired during a panel discussion at the Sefcon event in New York as participants debated the lack of buy-side participation in central limit order books (Clobs), one of two trading modes that all Sefs are required to offer. A year after Sefs started operating officially, buy-side firms continue to overwhelmingly use the request-for-quote (RFQ) approach that apes traditional phone-based trading.

"Most clients tell us they get arguably better pricing by showing who they are to one of their liquidity providing partners than they would get in an anonymous interdealer market," said Nathan Jenner, chief operating officer for fixed-income electronic trading at Bloomberg.

He added that of the average 1,000 index credit default swap (CDS) trades executed daily on Bloomberg Sef, just 30 to 50 of those trades happen via its Clob. It sparked an immediate response from Rana Chammaa, head of rates and credit derivatives agency trading sales at UBS.

"I would say it suits Nathan to suggest most of his clients get better pricing by name give-up. He mentioned that [Bloomberg] has an order book but that it has not seen much activity in interest rate swaps. We would love to connect to that order book, Nathan, but I think there are some impartial access issues there. We need to see some enforcement of the impartial access guidelines put forth before we see the full spectrum of order book trading," she said.

We would love to connect to that order book, Nathan, but I think there are some impartial access issues there

"My name keeps coming up, so I better respond," Jenner retorted. "Anybody that wants access to Bloomberg's order book via API, there are a number of Bloomberg people here [to speak with]," at which point Chammaa interrupted with a heavily sarcastic: "I'll do that."

Tensions between the two firms first became public in June this year, when Paul Hamill, head of execution services at UBS in New York told that Bloomberg had configured its platform so "it is still not possible for a client to choose the introducing broker model, as the Sef has not built out the infrastructure to support the pre-trade credit check for on-behalf-of trading".

Bloomberg denied those accusations and highlighted its well-publicised first sponsored access trade executed in February by Credit Suisse on behalf of its client, Nisa Investment Advisors.

The spat is essentially a clash of business models. Bloomberg has built its Sef as a way of adding value to buy-side users of its terminal – it charges subscribers just $10 per trade to execute an interest rate swap on the platform. UBS's Neo, meanwhile, offers an introducing broker or aggregation service – customers can execute trades on any of the platforms to which it is connected without having to go through the rigmarole of setting up a direct connection or, in Bloomberg's case, licensing a terminal.

UBS claims Bloomberg is dragging its heels in enabling credit checks of firms that access the Sef in this way – without which trades cannot be concluded – and has suggested this could be seen as a breach of Commodity Futures Trading Commission (CFTC) rules: "The CFTC's impartial access standards are clear that Sefs must provide open access to all participants, including those wishing to access liquidity through an introducing broker," Hamill said in June.

As of October 23, Bloomberg was seeing 66% of all dealer-to-client trade flow in interest rates, index CDS and forex swaps.

Speaking at Sefcon, Bloomberg's Jenner went on to question the rationale for Sef aggregation, resulting in another ill-tempered exchange with Chammaa.

"There are 25 to 30 liquidity providers in interest rates. If you look at Tradeweb, Bloomberg and MarketAxess, we all have the full set of liquidity. By aggregating Bloomberg and Tradeweb on the rates side, it's not clear what you get: you get the same pool of liquidity, only you get it twice. We are talking about the same instrument and the same liquidity providers, so I don't know what aggregation gets you," said Jenner.

"Thank you for clarifying that there is no difference between Bloomberg, Tradeweb and MarketAxess," Chammaa shot back. "There are Sefs that specialise in particular products and that is where you will see innovation and competition."

One issue on which the two panellists did agree is the chilling impact that post-trade name give-up is having on Clob use – in other words, the disclosure of counterparty identities after a trade has been executed in a Sef's limit order book.

The practice is used at platforms run by interdealer brokers, where Clob trading continues to be dominated by the banks. In contrast, dealer-to-client Sefs, including Bloomberg, offer fully anonymous trading on their order books.

Critics of name give-up claim it is being used by the brokers to discourage buy-siders from joining the brokers' Clobs, and preserving the traditional split in over-the-counter markets between interdealer and dealer-to-client markets – clients say they do not want their identities, and by extension their trading positions, to be revealed to counterparties in supposedly anonymous order books. Supporters of the practice say it helps ensure market-makers are not being gamed by their clients.

"We need to have better clarity and potential enforcement of anonymity rules around Clobs. We have many clients that are sitting on the sidelines with regards to trading on the larger Sefs because they still maintain post-trade name give up for central limit order book trading," said UBS's Chammaa.

"Our order book is anonymous, post-execution. I can't really think how you can operate an effective order book without doing that," Bloomberg's Jenner said.

Speaking later in the day, the CFTC's Vincent McGonagle, director of its division of market oversight, said the agency is now looking at the issue, and implied the regulator has made up its mind about the outcome: "We are going to ask questions of the Sefs and market participants, hopefully to the extent that this is an old business practice that was necessary for credit but that is no longer needed, and that it will quickly go away," he said.

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