This transaction showed that investors and dealers can realize the flexibility and efficiency of e-trading for credit derivatives by leveraging the current market structure and in a manner broadly consistent with the key principles of the regulatory reform.
Eight trades were completed by six investor clients using MarketAxess’s patented Request For Quote (RFQ) protocol. JP Morgan acted as the counterparty and clearing member, with trades taking place in both single-name CDS and credit indexes in the U.S. and Europe.
Trades were electronically delivered by MarketAxess to ICELink and selected trades were sent to ICE Trust for clearing; those that weren’t cleared were intermediated, or remained bilateral. The time for trades to be executed, affirmed, sent and accepted by the clearing house, was less than three minutes.
And most recently, last month RBS was the first dealer to offer live streaming markets on MarketAxess for CDS indexes – both U.S. high grade and high yield indexes (CDX) and European indexes (iTraxx). Using the MarketAxess ‘streaming markets’ protocol, investors are now able to initiate CDS trades with a single click on the platform and we fully expect to add further dealers to the streaming markets platform for CDS indices in the near future.
CDS is changing
The current total average daily trading volume in the global CDS market is over $100 billion in notional value, including indexes and single-name CDS. Our expectation is that approximately 70 percent of the daily CDS trading volume will represent clearable swaps under the new regulations.
Regardless of the final timeline for implementation, market participants are facing crucial decisions today that will impact their business for some time. The central goals of the regulation: to reduce systemic counterparty risk and increase transparency in the over-the-counter markets through electronic execution and central clearing, are sound and we believe that preparing for this new environment is a priority for the industry.
Over the long term, central clearing has been demonstrated to increase liquidity by opening up markets to a greater number of participants. And the transparency and efficiencies offered by electronic execution have also been shown to result in increased volumes across a wide range of asset classes.
In the short-term however, one thing is clear; preparing for the e-trading environment mandated by Dodd-Frank requires substantial connectivity with and between clearinghouses, SEFs and swap data repositories, among others. Much of the already existing connectivity between counterparties and service providers can be leveraged. The challenge for the industry, however, is to do this in a consistent way within the new regulatory framework.
The technology changes required to comply with these rules are extensive and call on wide-reaching coordination throughout the industry. Although these changes are not occurring from a standing start, they do represent a significant shift from the way the market is transacted today and the industry needs to lay the ground rules for the transaction process flows between participants that will enable compliance with the new regs.
Regulatory momentum is strong
Despite the justifiable uncertainty being felt today, regulatory change is inevitable and the current that’s pulling the industry toward greater automation and transparency will only grow stronger.
Our job as market participants is to work together to ensure that these regulations fulfill their critical purpose – to continue to support a thriving OTC derivatives market that enables the efficient and effective management of risk on a global basis.