Adapting a CLOB to trading on SEFs presents significant obstacles: The idea of trading swaps in a CLOB, which essentially alters relationship with counterparties, is a somewhat new concept.
The final SEF regulations allow a SEF to utilise"“any means of interstate commerce" in providing execution (i.e., an order book or an RFQ System that operates in conjunction with an order book). This leaves open the question of whether the term "order book" is the same as central limit order book (CLOB).
"CLOBs do get a lot of discussion with market participants", said Chris Amen, head of US institutional rates markets at Tradeweb. "A driver of that dialogue is uncertainty surrounding information leakage and market impact when our clients execute trades electronically. We’re looking at a number of aspects of the swap market that might support large scale participation on CLOBs, but it’s still very early in the adoption of derivatives e-trading."
Futures commission merchants (FCMs) play a crucial role in not only connecting their clients to SEFs and DCMs (designated contract markets) but in ensuring that clients do not exceed their approved credit risk limits. This need has been fulfilled by post-trade service providers such as Markit and Traiana, as well as by the SEFs themselves. "In order to guarantee that there would be the margin for the buy side to do the trade every time the SEF would have to ping out to and have the connections to pretty much every single FCM in the world or where the buy side sides have a relationship with", said Sassan Danesh, partner at Etrading Software, a financial technology consultancy. "And that model has meant that you would have to have the Traianas and the Markits coming in to provide solutions so that it’s much more of a hub and spoke."
"FCMs have become much more comfortable around pre-trade counterparty credit", he said. "Clients get approval notifications immediately from the FCM, and the trading process that follows is seamless. We’re working to determine how that pre-trade credit checking process can translate quickly into essentially, an order book. We think FCM’s will get there in the near future, but likely with a select number of accounts. There’s a lot still yet to be determined."
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