“How will errors be handled? That’s the biggest area of discussion with SEFs,” said Bis Chatterjee, Global Head of E-Trading and New Business Development, Credit Markets, at Citigroup Global. SEF refers to a Swap Execution Facility. He was the second of two speakers at a GARP-sponsored webinar, about changes to the over-the-counter (OTC) credit default swaps (CDS) market, held on April 15, 2014.
“The market had less time than it would have liked to review various rules of the new guideline,” Chatterjee said, referring to the flurry of market response to the new regulations brought in by the US Commodities Futures Trading Commission (CFTC) regarding SEFs.
In the changed landscape of the OTC market, “the heaviest focus is on the clearing agreement,” according to Chatterjee. “If you are not able to obtain a clearing membership, you must choose a partner that is.” There are multiple clearinghouses offering the same rates, but “the basic set of rules might be different.”
The concept of operational connectivity may not be fully sorted out for the multi-to-multi situation. “Because of the new SEF paradigm, the market was scrambling,” he said.
“Trades are often executed a s part of a package,” according to Chatterjee. “The concern in the market is: if one leg was forced to be SEF, how about the other one?”
There are two sets of costs, Chatterjee noted: fees, plus indirect transactional costs as liquidity changes. “Even though the costs are higher, giving lower returns, the operating system is less risky,” said Chatterjee. Therefore, the Sharpe ratio may stay the same.
Something to keep an eye on for 2014-2015 is the statutory liquidity ratio (SLR) and capital. “These are two big issues that impact the market. The capitalization of [central counterparty] CCP is still a big topic under Basel III,” said Chatterjee. As well, no one knows how SLR will affect the volume of OTC trades. All in all, the dust has not settled yet on the rapidly changing OTC market. ª