Single-Dealer Platforms in a Cleared World

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A CAPLIN WHITE PAPER

Single-Dealer Platforms
in aCAPLIN
Cleared World
BY PAUL

www.caplin.com

APRIL 2012

Far from signaling the end of singledealer platforms, the impending raft of new regulation in the US and Europe
will create a new business
environment in which the
direct online channel is more
important than ever for both
banks and their clients.

Paul Caplin, CEO of Caplin Systems Ltd. founded
the company in 2000

Soon after the publication of the Dodd Frank
act in the US, some early commentators
suggested that the forthcoming prohibition
of bilateral trading of liquid swaps signaled
the death knell of single-dealer platforms
(SDPs), the banks’ proprietary online trading offerings.
But, as with Mark Twain, reports of their
death were greatly exaggerated. Far from
backing away from SDPs, virtually all tierone banks – and many smaller firms – have responded to the imminent shift in market
structure by increasing their spending on
SDPs.

2

A CAPLIN WHITE PAPER

According to FX Week, the head of foreign exchange at a top-tier bank recently described this as the “secret weapons
program now under development at most
banks”.
The successful SDP of tomorrow will
provide essential customer services in a
fragmented multilateral marketplace. It
will deliver swap execution facility (SEF)
and organized trading facility (OTF) aggregation and smart order routing, integrate this smoothly with OTC trading of illiquid/off-the-run instruments, and link it
to the clearing and collateral management

services through banks will actually make
most of their money as parts of their business switch from a principal to an agency based model.
Banks that understand and embrace this
will establish a secure and profitable position at the centre of their clients’ trading workflow.
This paper explains how this will work,
and looks at what banks stand to gain from
proprietary online channels in the new
world order.

RULES AnD REgULATIOnS
A major consequence of the 2008 financial
crisis was a new and aggressive approach
to the regulation of the over-the-counter
(OTC) financial markets. Agreed in principle
at the g20 summit in 2009, and reaffirmed
the following year, this regulation is being
introduced via the Dodd-Frank act in the US
and under the umbrella of the EMIR/MiFID II/
MiFIR programs in the EU.
The stated goal of regulators in both
cases has been to reduce systemic and
counterparty risk by banning OTC trading of
a broad range of liquid instruments, mandating instead a central counterparty (CCP) model for clearing and obligatory use of
multilateral trading venues.
At the time of writing, we are still
months from knowing the final form that
the new regulations will take, and there is a
clear (and potentially worrying) divergence
between the approaches being taken in the
US and EU. The regulations in the US are
primarily focussed on the swaps markets,
and will not affect bonds. Foreign exchange

(FX) spot and swaps trading have also been
excluded. In Europe, however, a much
broader scope is envisaged for the MiFIR
juggernaut, whose scope currently includes
almost all OTC foreign exchange and fixed
income instruments.
In the US, the CFTC has made it clear
that banks will not be permitted to own or
control SEFs, the venues on which centrally
cleared swaps will trade.
A recent Tabb Forum post1 entitled “Can
Single Dealer Platforms Become Organized
Trading Facilities?” points out that the EU
regulations are still unclear on whether
banks will be permitted to own OTFs in
Europe, but that probably they will not.
The result is that a wide range of liquid
swaps (in standard size and term)– and potentially other instruments in Europe – will soon be traded in the West only through
multilateral execution venues and cleared
through CCPs. Banks will no longer be permitted to deal directly with their clients in those instruments.

“We reaffirm our...
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