I was at the, generally, very good SIFMA FI e-Trading Conference in London last week. Certainly the buzz product was Interest Rate Swaps. This confirms what most banks have told me this year, that getting their IRS offering right is their no. 1 priority – as a side issue, CDS was mentioned, but my impression is that this is still some way off, in terms of single-name trading extensively electronically, due to operations issues more than most.

Liquidity Hub were part of the Swaps session and, naturally, believe activity in e-trading of Swaps is about to grow exponentially now that both clients and banks have bought into the concept. The general consensus was that this will be lead by 10-year € Swaps before moving throughout the curve & into $ – although one ECN saw EONIA Swaps as leading the charge.

Whilst counterparty credit risk remains an issue, it is not believed to be an impediment to e-trading of your vanilla swap products, more so the more complex structures – which if traded electronically will remain on a single-dealer arena for now.

The key 3 areas to focus on where given as:
1. Ability to Execute various strategies, such as butterflies, curve trades, asset swaps, ability to unwind swaps once they’re non-vanilla.
2. Automating the credit process
3. Contract standardisation.

STP was a distant 4th, thus maintaining the status quo of “STP is important, but there are many things that are as or more important”.

One of the reasons I can see Swaps taking off (& later CDS), and not discussed at SIFMA, was the fact that there have been so many new buyside traders of the product over the past 2-3 years. These traders have come from bond backgrounds in many cases and have been used to doing their liquid bond trades, up to certain size, via an electronic platform. As a result they should be more e-savvy than your 10-20 year veterans in the market. Make sense or am I clutching at straws?

Either way it all sounds very positive, especially when you hear many of the Hedge Fund managers at the Conference stating that a truly multi-dealer Swaps platform would get their support. The only problem is that they want more than vanilla IRS….they want non-standard dates; curve trades & Forwarding start swaps….and that’s the easy stuff. One in particular sees a future based on an open, public order-matching arena, a.k.a an Exchange. Where as the Sellside see a far greater future for single-dealer solutions for non-vanilla product…..but more on that in another blog.

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