Celent hosted an interesting WebEx yesterday on Dodd-Frank and EMIR Regulation, Derivatives Reforms and IT Impact.
They presented a risk analysis based on three potential scenarios that could develop, depending on how the final SEF and OTF rules fall out.
Amongst the key characteristics of the market structure they see developing include:
- Two tier model for SEFs with separation between an interdealer and dealer-to-client SEFs
- Single Dealer Platforms qualifying as OTFs/SEFs (due to loose definitions)
My view:
I certainly agree that SDPs can qualifying as OTFs, although according to an item in today’s FT, German and French regulators are questioning the need for OTFs .
However, I can’t see how Celent could imagine (under any scenario) that SDPs could also qualify as SEFs, as the 25% ownership limitation for SEFs would by definition preclude bank SDPs from becoming SEFs. Our view is that SDPs will become a major channel through which clients access SEF liquidity, through the use of SEF aggregation.
Below is one of the more interesting slides, which looks at possible market structures. Celent’s view is that scenario 2 is the most likely outcome.
Celent state that:
In a new report, Swap Execution Facilities and Organised Trading Facilities: A New Market Structure Emerges, Celent offers key insights into the likely future direction of SEF/OTF markets and critical factors setting this direction. Based on these insights, Celent believes that there are multiple scenarios for the market structure to reach the SEF/OTF future state. However, because of fragile liquidity, industry feedback, and cautious regulators, a dominant scenario emerges as the most likely outcome.
