Preparations to trade more derivatives electronically have taken a step forward after brokers, intermediaries and trading venues agreed a common set of technical standards for trading swaps, allowing the industry to cut the high cost of connecting.
The world’s largest traders of over-the-counter products have signed up to a common computer language as they create new electronic networks to comply with the global regulatory overhaul of the market.
To safeguard the financial system, legislation such as the Dodd-Frank Act in the US has decreed that more of the vast $700tn global swaps market be moved on to electronic trading venues and processed through clearing houses.
However, it is a significant shift for an industry which hitherto conducted most of its deals bilaterally and over the phone. The broker-dealer dominated market has been further complicated by the opening of new types of trading venues. In the US they are called “swap execution facilities” (Sefs), and “organised trading facilities” in legislation under consideration in Europe.
Each of those venues historically has had its own proprietary protocol, or software language, however, and each investment bank has to create a custom-built platform to connect to each venue. Furthermore, it costs roughly five times as much to connect to a bond market platform than to an equity trading platform.
Some regulators worry that there will be fewer entrants than forecast as high IT costs dissuade brokers from using new venues. Part of the drive behind greater competition and price transparency is to break the hold of a small group of global dealer banks that dominate four-fifths of the OTC derivatives business and reap an estimated $50bn in annual revenues.
“The adoption of a market standard for messaging is integral to the growth of an effective swaps market,” said Joe Feerick, head of product management at MarketAxess Europe, which has signed up to the agreement.
Morgan Stanley, Barclays, Goldman Sachs and the other 10 banks that form the Fixed Income Connectivity Working Group have signed up to the deal, as have interdealer brokers BGC Partners, ICAP, Tradition and GFI Group. Trading venues set to qualify as Sefs include Eris Exchange, Tradeweb, Dealerweb and Creditex.
The work on the technical standards was conducted by ETrading Software, a UK-based financial technology consultancy. It is based on the Fix protocol that is used for carrying data and trading messages around the world’s equity markets.
Sassan Danesh, chief executive of ETrading Software, told the Financial Times that work would continue on industry technical agreements for trading of cash bonds and marrying up differing standards for conducting trading and post-trade services.
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