“If the rules go through as proposed, the derivatives market is going to change dramatically,” said Rick McVey, chief executive of MarketAxess, which provides an electronic credit trading platform. “We're certainly ready and we expect to be one of the first to register as a swap execution facility.”
MarketAxess’s trading platform initially focused on bonds, but the company has also unrolled a platform for credit default swaps in recent years. Since corporate bond traders tend to also trade CDS, McVey believes the company’s platform could be a natural choice to trade derivatives. And with a product cycle of only about five months from the design to the release of a product, he thinks the company could move as soon as rules are released and come up with a finalized product in a timely manner.
“We’re confident we would be ready to go for whatever implementation date the CFTC and SEC agree on,” he added
Christian Hauff, chief executive of Quantitative Brokers, a provider of algorithmic trading services for the interest-rate market, also considers the regulatory changes about to take place in the derivative world as a positive trend. But he wants to wait until the rules are finalized before anticipating changes and unveiling new product offerings.
“It’s clearly a hot area seeing a lot of attention from the buy side and the sell side,” he said. “But we’re not going to speculate. We’re in 100 percent holding pattern.”
One of the reasons for not jumping the gun quite yet is that uncertainties remain. For one, definitions haven’t been finalized yet and regulatory agencies are running behind schedule to release rules. Additionally, the regulatory responsibility of swap securities and swap indexes is split, with the SEC overseeing securities and the CFTC overseeing indexes. While the SEC rules promote more flexibility and preserve client choice in picking dealers, the CFTC is much more specific in its set of rules, requiring clients to go to at least five dealers for every inquiry.
"We hope their final rules will converge otherwise trading systems like MarketAxess will have to offer two different sets of protocols for CDS and CDS indexes," said McVey, adding that the company’s trading platform already qualifies for SEC compliance.
Overall, most fixed income technology companies, including those focused on bonds, have been picking up market shares in recent years because of the regain in interest in fixed income products and investors’ search for yield. The fixed income market is also maturing and following a natural evolution toward an increased focus on electronic trading.
"There's clearly much more focus on electronic for both bonds and derivatives than a year ago,” said McVey, adding that it ultimately increases competition and reduces transaction costs.
“Our corporate bond business is busier than it might have been a few years ago,” concurred Ted Bragg, managing director at Pershing, a BNY Mellon company. “Now we have evolved more toward an equity model because of the ability to price corporate bonds more like equity.”