OK, let’s start with a fact….government bonds are the Kings of FI e-trading. Nothing controversial in that. However……..

With the advent of Liquidity Hub, including IRS at the core of the offering (waratah is of the opinion that US Treasuries are a bit of an add-on at this stage) and the “near-thing”of Swaps House – are OTC Derivatives, starting with vanilla swaps, really the future of FI e-trading?

Certainly you could debate the reasons behind the formation of Liquidity Hub, but generally I see this as a positive development to both sides of the market. A commitment to provide unprecedented liquidity in a major commoditised product has to be a good thing for clients……no?

Let me define the main clients here: Hedge Funds, Fund Managers (increasingly) and non-Price Making Banks. Corporates will eventually be a major client, however their goals regarding swap activity are (or should be) different to the above institutions – plus they’ll need a platform where they can deal in FX, Money Markets and Derivatives.

Although Swaps, and a few other OTC Derivatives, are offered electronically now, primarily via single dealer pages on Bloomberg & via the swaps platform on TradeWeb (talking B2C here), you could hardly say it has been a hit with clients.

One of the main problems has been the fact that only standard dates have been offered. So no broken dates*, no forward-start swaps and no switches/curve trades possible. Likewise there has been no functionality available to tidy up books. This is not to say that Liquidity Hub and whoever is chosen as the vendor/s will provide this from the get-go, but at least they appear to be making the right noises, so waratah hears on the grapevine. Having market maker buy-in, for one, is a major step forward and client feedback should help push them to offer all of the above in time.

So, returning to the question “are OTC Derivatives really the future of FI e-trading?” My answer is a definite yes! More and more IRS will move electronic. Before too many years pass, I see buyside swaps traders being in the same position as buyside government bond traders now…..in terms of “how did I ever do this over the phone?”.

Swaps will be the starting point, however I see single-name CDS as the real revolution in the future. As I blogged last week (see my home page), institutional credit in Europe has been an electronic failure. CDS should be the white knight once it is sufficiently mature in terms of standardisation and narrowing of bank margins…….some feel it is ready now. In terms of liquidity it is already ahead of the cash market.

To conclude, the current kings of FI E-trading, government bonds, will still be royalty in 2015, but maybe they’d have abdicated their top spot to OTC Derivatives – I also think, thanks to basis trading vs. Futures, Swap etc, their electronic volumes will have also grown, but that’s for another blog. Of course the complexity and size of some trades will be an issue electronically where derivatives are concerned. But for vanilla derivative products, such as Swaps (including many non-standard varieties) and single-name CDS, these are the jealous princes of FI e-Trading….ambitiously eyeing off the older man’s throne!

*Footnote: Indeed some banks do offer broken dates via BBG, however it remains a handful & all but 1 price them manually. They need to become mainstream.

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