US watchdog approves new venues for trading interest rate swaps

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US regulators on Friday formally recognised 18 new venues for trading interest rate swaps, reflecting the industry’s growing uptake of electronic trading under new rules.

New rules for trading swaps, which are used by banks and corporations to either hedge or take exposure to fluctuating interest rate and currency moves, have dramatically altered the market in the US.

Requirements mandating the electronic trading of certain swaps on venues called “swap execution facilities” came into effect in February 2014, but until today the new platforms had only received temporary approval from the Commodity Futures Trading Commission.

A recent study by the Bank of England into the most widely-used product, interest rate swaps, found the costs for banks and other market participants of trading US dollar swaps fell by $20m-$40m daily, and by $7m-$13m every day for end users under the new rules.

Those cost reductions have crimped profits among the brokers that have traditionally dominated the market. The interdealer dealer brokers who help negotiate private deals have also been combining operations, with BGC purchasing GFI Group and Tullett Prebon agreeing to take the global broking assets from ICAP.

“These registrations represent continued progress toward the implementation of a new framework for trading on regulated platforms, as called for by Dodd-Frank and the G20 leaders. It is bringing greater transparency, better price information and greater integrity to the process,” said Timothy Massad, chairman of the CFTC, in a speech in Florida.

Another five, including Clear Markets, FTSef and LedgerX, remain temporarily registered and the CFTC is continuing with the review. FTSef have submitted a rule book to the CFTC that replicates much of Thomson Reuters rule book, which received approval from the CFTC.

The full list of approved Sefs also includes venues operated by ICAP, BGC Partners, Tullett Prebon, exchanges CME Group and Intercontinental Exchange and data provider Bloomberg.

Despite many platforms competing for business, much of the volume is concentrated among a few big players. Almost 50 per cent of plain vanilla swap trades were conducted on Bloomberg or Tradeweb in 2015, according to Clarus FT data.

Average monthly interest rate swap volume has increased from $1.2tn in 2013, to over $2.4tn in both 2014 and 2015, according to data from Clarus FT, with roughly 80 per cent of trades now conducted on Sefs, according to estimates from the Bank for International Settlements and the International Swaps and Derivatives Association.

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