Although news reports published immediately after the go-live date on October 2 suggested that Bloomberg had emerged as the early leader in the race to capture multilateral platform flows of non-deliverable forwards (NDFs), FX options and non-deliverable swaps, subsequent releases indicate other providers more traditionally associated with FX brokering have captured substantially more volume.
For example, publicly available data related to SEF FX derivatives trades on October 17 show that while Bloomberg reported $234.7 million total daily volume, Tullett Prebon reported more than $5 billion, Icap reported $2.9 billion and GFI reported $992 million.
The difference in reporting approaches is also apparent in the electronic communication network sector, with Thomson Reuters/FXall SEF reporting on a traded volume basis while competitor 360T Trading Networks reported total liquidity numbers. Thomson Reuters captured $282 million in NDF and options volume on the day under observation.
360T, meanwhile, which received a temporary registration from the Commodity Futures Trading Commission (CFTC) in late September, says it attracted in excess of $17 billion in total liquidity, supported by $11.5 billion of commitments in 3M USDINR.
“This figure represents total liquidity and not trades executed,” spokesperson Claudia Stirner stated in a written response. “We are planning to provide additional information fields shortly and this will include executed trades.”
While some commentators are attempting to build time series data to monitor liquidity and execution trends in the newly regulated electronic environment, the lack of data consistency means it will probably be some time before comparisons can usefully be made.
“Not all SEFs are equal and there is a wide degree of variation between the methods used to publish data,” says one currency manager. “Although aggregate volume measures are certainly important and interesting, it’s not obvious that quality information is available yet.”
Given that FX derivatives are not yet mandated for trading under Dodd-Frank, the aggregate SEF volumes are, understandably, still relatively small.
“We’ve been pleased with the volume of FX derivative trades executed on our multi-asset class SEF, considering these instruments are not yet mandated for trading,” says Ben Macdonald, Bloomberg’s global head of product and president of Bloomberg’s SEF.
“Participants might have chosen to avoid the process for non-mandatory instruments, but there has been plenty of interest and trading activity – in fact, more than many expected.”
In addition to a lack of consistency in data provision, traders point to confusion around CFTC rules, the diversity of operational models and the general difficulty of connecting to SEFs as factors contributing to the relatively low SEF-based volumes.
Indeed, in a recent communication to the market, 360T acknowledged that: “Although we ardently believe in the long-term benefits that the SEF regime will bring to the derivatives market and are confident that 360T will play a significant part in bringing about those benefits, in the short term we recognize that the implementation of new trading rules is likely to be a source of great uncertainty and concern for many of our participants.”
US regulators recently compounded that uncertainty with the now infamous footnote 88 to the CFTC’s final SEF rule, which seeks to capture cross-border counterparties transacting with US-persons within the Dodd-Frank compliance.
After fears that uncertainty would shock liquidity away from aggregators where US persons might be trading, traders now say US dealers are restricting FX derivatives liquidity to the relative safety of their single-dealer platforms and traditional voice-brokered markets.
It’s a somewhat ironic, albeit potentially temporary, outcome for the highly anticipated rules which are intended to increase transparency and access to best execution for investors.
“Since the rules were announced, we’ve noticed a material deterioration in liquidity and pricing in NDFs on the aggregating platforms,” says Paul Chappell, founder and chief investment officer with C-View, a UK-based currency investment firm.
“Banks, specifically US banks, are either not showing NDF prices on SEFs or they are showing them considerably wider than on their proprietary platforms. Right now it’s far more difficult to find the best bid and best offer than it was previous to the regulation.”