What I learned at SEFCON 5

I had my doubts about SEFCON 5.  I had even told one of the sponsors weeks in advance, tongue in cheek, “SEF’s are live and ticking, what’s there to talk about?”  I knew better, and I indeed learned a few things.

I’ll detail a few of the hot topics.  Many of these came up multiple times in separate panels.


Order books are not very active yet.  RFQ’s remain the primary method of execution.  This came up multiple times.  My takeaway is as follows:

  • Deeper liquidity is on offer in RFQ in any size. Shawn Bernardo in particular discussed what an order book would look like a minute before numbers come out.
  • Nathan Jenner pointed out that in their CDX trading, he quoted 30-40 trades out of the 1,000 or so done in any given day are done on CLOB. So 3% done in the order book.
  • I’d surmise clients do like an order book, but only as one option of execution, and for any size they will go to a phone.
  • CDX is highly standardized and lends itself more to a CLOB. When the most active Interest Rate swap trades only 200 times in a day (spot starting, 10 year swap, as seen on SDRView), it does not lend itself to an order book as readily.
  • MAC contracts may be this standardized contract that gets the order books going.


There was an active debate particularly between Nathan Jenner of Bloomberg and Rana Chammaa of UBS regarding the agency model.  I’d boil this down to Bloomberg having a very successful marketplace in their SEF, but not providing FREE access to it.

I’m not clear on the legalities, but it seems there are some hurdles to agency trading on some venues.  I have heard that some SEF’s have had difficulty in the agency model but worked around it – I liken it to me providing agency access to Amazon – I’d have to log off and log back on to Amazon to get my client’s credit cards etc loaded before I buy that book for them.  However, add to those logistics the commercial model whereby Bloomberg’s SEF is on a terminal and you can begin to understand the underlying dispute.

However the discussion unraveled (including an abusive audience question) to the point where the agency model was questioned as valid.  My takeaway is that the model is indeed valid; while there are clients that will prefer to connect directly, there will ultimately need to be ways for smaller firms or firms that cannot justify the capital expense (in connectivity, legal, regulatory, etc) to access SEF liquidity.


Scott O’Malia returned to SEFCON under the ISDA umbrella and led a good panel specifically on this topic.  He put up some graphs that I frankly struggled to absorb fully, but I got the point:  Scott has some data to back up, beyond common sense, that EUR and USD liquidity pools are indeed fragmented.  To corroborate this, Dexter Senft of Morgan Stanley cited their own case of moving their swaps business to London.

For the newcomers to cross-border issues, I would summarize the problem as:

  • Europe favors “substituted compliance” – or as I’d put it “Trust the other jurisdiction to care as much as you do to police everything”.
  • America favors dual registration – or as I’d put it “you need a license from the CFTC to run that facility, and US firms can only interact with such licensed utilities”.

What I hadn’t appreciated was that the OTF/MTF concept will likely not be in effect until 2017, so we can generally forget about solving this until then, although Edwin Schooling of the FCA did say that its possible some early-bird registering ETF’s could try to become “equivalent”.  I wasn’t inspired.

One pretty horrific consequence of this is that firms like Virtu (presumably a US Floor Trader) are not able to trade in the European pool of liquidity, if I understood John Shay correctly.  I would infer Citadel and the other new entrants are in the same position – currently vying for the few hundred swaps a day.  I’d think that would make the 2nd tier of new entrants unable to justify entering the business.

Dexter Senft raised the “Elevator Rules” that were born at the previous year’s SEFCON.  He cited the case of cross-border rules going as far as prohibiting a European firm trading with another European firm when it requires any assistance from someone domiciled in the US.  I was fortunate to be sitting next to the CFTC member who wrote that rule (or footnote), who quietly told me that the real problem is that there are no record keeping requirements for that kind of arrangement.

In summary, cross-border seems as enigmatic as ever.


Some of the SEF order books are anonymous order books, but named post-trade give-ups.  In my opinion this topic has been a bit taboo, and this is really the first venue where I’ve seen it discussed openly.  The real problem here is that banks and clients are happily maintaining the dealer/client relationship structure, despite the all-to-all mantra.  Legally, nothing is keeping a “client” from joining an IDB SEF.  But the day that Hedge Fund ABC trades a swap with a G14 bank, someone might get upset.  I feel for the IDBs as it would seem their core business has been attacked.

It’s like being a real estate agent and being told that homebuyers can knock on your customers’ doors to look around their house.  You’re not happy because it trivializes your service; anyone can post a few pictures on the internet to match a buyer and a seller.  And your primary clients are not happy because they have un-screened riff-raff stopping by their house at dinner time to look around.  Poor analogy I know, but the core business of IDB’s is going to have to change.

It’s not clear to me if the named give-up is legal under the SEF rules.  I believe it is.  But because it jeopardizes the all-to-all structure, I think the CFTC will feel the need to step in.  Just how they do that, I don’t know.  Can they really dictate post-trade workflow for derivatives?


  • CFTC again justified some of the lack of progress on lack of funding. I truly am amazed at how much has been accomplished on such little budget.  It also astounds me that earlier that morning they fined multiple firms for 1.5 billion dollars, yet they have to run their agency on a fraction of that.  Surely they deserve a small commission on their enforcement!
  • NDF clearing mandate seems to be raising steam, yet with no timeline.
  • Massad claims he is open to the idea of changing the MAT process.
  • Marisol Collazo of the DTCC claimed the DTCC have an effort to clean up the data, and also referred to some trades she was aware of being double-reported to both DTCC and another SDR (presumably BSDR). That didn’t fill me with confidence.


All in all another great SEFCON.  I suspect we’ll have things to talk about for a few years to come.  I think it will need to go global and become SEF-OTF-MTF-CON at some point.

I look forward to next year, SEFCON 6.

Stay informed with our FREE newsletter, subscribe here.

2 thoughts on “What I learned at SEFCON 5

  1. Thank you for this excellent recap.
    If your comment about the “abusive audience question” was how much volume does NEO execute. I think that is a very relevant question. Especially since she continually presents herself as being at the vanguard of the transformation of execution in the new DF world. Or some other TED type speech that is removed from reality.
    With only a handful of actual trades to thier credit, the reality is they are the ones hiding a very inconvenient truth, and the question is very relevant.
    To Paraphrase her, it is not just convenient for Bloomberg to mention that customers get better prices on a disclosed RFQ. It is a fact.

    1. Thank you for the comment. It was indeed the question referring to the Neo volumes. I agree the nature of the question is relevant (the degree of activity over Neo and all agency aggregators), as the empirical evidence shows there hasn’t been significant takeup yet. To clarify my “abusive” comment – the question came from an audience member who didn’t identify themself, pronounced Rana’s name incorrectly, and I felt was confrontationally addressed. But as you say, valid.

Comments are closed.