Hobson: What is the current state of SEFs in both Europe and North America?

Transcription

1 1 The long awaited launch of fully compliant trading platforms for OTC swaps got off to a chaotic launch on 2 October, thanks less to the accompanying extension of the compliance deadline to 1 November necessitated by the coincidental shut-down of the United States government than the unexpected content of the notorious Footnote 88 to the Commodity Futures Trading Commission (CFTC) rule book published back in May. By specifying that swaps should not wait to be clearable before they became tradable, the markets were plunged into a period of confusion from which they have yet to emerge. To review how fund managers should approach the current SEF marketplace, the regulatory status of SEFs and the compliance obligations created by SEFs, COOConnect founder Dominic Hobson sat down with Jack Callahan, Executive Director, OTC Products at CME; Peter Best, Group Head of Market Development at ICAP; Silas Findley, Managing Director, Citi Futures and OTC Clearing and EMEA Head, OTC Clearing at Citi; and Bradley Wood, partner and co-founder of GreySpark Partners, the capital markets consultancy that has published three in-depth research studies of the coming of SEFs. Hobson: What is the current state of SEFs in both Europe and North America? Best: The final compliance date for SEF trading was October 2, and that seemed to be the go-live date for all the temporarily registered SEFs, of which there are in the range of 18 to 19. I think we all went live last Wednesday. Every SEF applicant to date has I believe been a US applicant. Certainly, from our point of view, we have a US company as our SEF. Parts of the US business of ICAP are now executed exclusively on the SEF because that is what the rules tell us we have to do. Internationally, the state of play is more anecdotal, and it is likely to remain so until the CFTC make their required determinations according to the trading rules that have been made available. But we have had what I would say is a surprising amount of volume taking place between US persons and European and Asian customers in the first few days of SEF trading. When I say a surprising amount, I mean that it is not four or five trades. It is more like a hundred trades per day outside of the United States. Callahan: That is a pretty accurate summary. The main thing I keep hearing from clients is around uncertainty. As you know, there were some last minute clarifications from the CFTC with the extension through to November 1. So clients are anxiously awaiting further clarity as to what the ultimate rules of the game will be. When you look at what else is on their plate there is still certainly quite a bit of work to do in evaluating the SEFs, particularly in terms of the participant agreements and the rulebooks, and I think this period between now and November 1 provides a good opportunity for clients to actually test out these SEFs to see if it is something they want to proceed with in terms of formally documenting their relationships with these SEFs. Findley: Uncertainty is a charitable term to use about what has happened. I would have said confusion was rife across the industry leading up to that day. I do agree very much that the pushback to November 1 has given the market a well-deserved chance to catch its breath around some of these issues. I think the application of the rules to

2 2 non-us platforms, with some of the potential implications for that from Footnote 88 and around extra-territoriality, is a salient point. We have had three years since the Dodd Frank Act was passed in the summer of 2010, when there was a really very short period of consultation about SEFs and their requirements. Three years later, we find ourselves with a quite extensive set of rules and very little actual technological development time for the industry. So we are seeing the forced evolution of a lot of these products into more standardised, more commoditised forms. We are also seeing a real cram-down, one might say, from the regulators in terms of some of the timeframes that they have given the industry to reform itself to what is obviously a very technologically driven platform. What we see on our side, as the representatives of a significant clearing member, is the concern from clients that that infrastructure has not had the opportunity for a sufficient level of testing. Hobson: Now, about Footnote 88. We were led to believe that there would be a phased introduction. As swaps went into clearing, they would move in lock-step with that on to the trading platforms. Then, suddenly, in the middle of a 500 page document we find footnote 88 saying something quite different. That has created what Silas calls confusion in the marketplace. When do you expect that confusion to dissipate? Wood: If I had a crystal ball I would be able to give you a view on that. The short answer is that I am not entirely clear, given the initial intent and the short term nature of the dates that were set. That meant there was not sufficient time to gear up technologically and to develop product offerings to meet the requirements. We have seen a large amount of litigation on the matter in the US. We have seen a large amount of lobbying, and requests both from buy- and sell-side firms, that question that clarification. I think, to a large extent, the push has been politically motivated. Prior to the election of President Obama to a second term, the intent prior was to ensure that the Democrats got this over the line before the Republicans might have come in. So I think a lot of the pressure stemmed from that. As a consequence, there have been a lot of is that have not yet been dotted and its that are yet to be crossed. In as much as these things are evolving, I would certainly echo the sentiments behind the comments made about confusion and uncertainty in the marketplace. Right now, we are very far from having a clearly understood marketplace for swaps. SEFs are up and running, certainly. In the D2D space it is easier to get a platform up and running than it would be in a negotiated, quote-based D2C environment. But I think there is a fair way to go in terms of clarification of the rules and in the way these might be implemented over time. So in respect of footnote 88, I would not like to hazard a guess as to when they may be resolved. Hobson: Another area of uncertainty is extra-territoriality. Are these Europeans and Asians trading with US persons running regulatory risks? Best: They are running regulatory risks only in as much as they are now potentially trading on US regulated platforms. But extra-territoriality is less about Europeans participating on US platforms and more about US platforms being pushed into the rest of the world. US platforms are being imposed on the rest of the world because of the requirement for US persons globally - the wider definition of US persons to be brought in to SEF trading rules to comply. Where we have issues is that you cannot just take a regulated platform and go across borders without seeking explicit permissions from each of the local jurisdictions, and there has not been any sort of time for that to be done. There might have been three years since the Dodd Frank Act was passed, but the SEF rules came out, or were voted on, on 16 May. They entered the Federal register on 4 June. So we had just 120 days to build platforms that need to go around the world and cover pretty much every derivative asset class that one can think of. That is a huge amount of change, not just in terms of technical considerations, but in terms of regulatory and jurisdictional considerations. They take a long time to address. Hobson: What are you telling non-us clients about trading on US regulated SEFs?

3 3 Findley: It is certainly fine to do it. One of the causes of confusion is the requirements for SEFs in the first place. Right now, there is no requirement that anyone trade on a SEF. Hobson: I thought you had to trade on a SEF if you were trading multi-laterally. Findley: Multi-lateral platforms, to the extent that they are subject to CFTC jurisdiction, had the 2 October deadline to register as SEFs. To the extent that you are trading on those platforms, you are obviously subject to those rules. However, even US persons do not have a requirement currently to trade on SEF platforms. If you are trading on one of the platforms that has registered with the CFTC, then by definition you are on those platforms. There is an additional source of confusion, because footnote 88 said that it was not only those platforms made available for trading that had to comply but any multiple to multiple. That led to a lot of platforms that are trading products that are completely out of mandatory clearing right now to investigate the potential to register as well, even in the FX market. So a lot of additional platforms got pulled in, which did not initially anticipate it. To the extent that I am a non-us platform, and I have a US person trading on that platform, does that somehow expose me to CFTC jurisdiction, forcing me to register? There are mixed views about that. A lot of the non-us platforms have been quite concerned. That has led to some bifurcation of liquidity. It has been an interesting process. Hobson: How many SEFs are up and ready to trade now - both dealer to dealer and dealer to client, and what are they trading? Callahan: 19 have registered with the CFTC. Just under half of them have been given formal approval by the CFTC to begin trading. Many of them have publically available data on their websites. There were a few s floating around last week where some market consultancies provided summaries of what is traded. At least four of them have been public with data namely, Bloomberg, GFI, ICAP and Tradeweb. It is still in its infancy, simply because of the uncertainty leading up to last week. Hobson: What do we know about the trading methods? Do they differ between dealer to dealer and dealer to customer platforms? Wood: The short answer is yes. On the D2D side it is an order book-based environment. It is, by and large, an anonymous order book trading platform, akin to an exchange. On the B2C side, you see a quote based, multi-dealer platform, not unlike the way Bloomberg operates. Best: That is not incorrect. The SEF rules allow for two methods of execution: central limit order book and a member request for a quote to execution. One of the conditions is that, if you are offering a product, you have to offer to a central order book. So, technically speaking, every SEF is offering a central limit order book for every product. Some may also choose to add request for quote functionality. That is obviously included where it currently exists, particularly in electronic form. Also, while we are in the committed stage there is not really a concept of block trade thresholds and so on. What is actually happening in fact, what has had to happen because there has been only 120 days from the start to the conclusion of this - is that a lot of activity is being arranged off-sef at the moment, and then being effectively crossed on to the SEF as if it were a block trade. Which means that market participants are slowly getting used to the infrastructure behind SEFs, but not really too active explicitly on the SEF. That will continue, and probably be sequenced towards the required determinations when our block trade thresholds really kick in. Then we will start to see just how much SEF activity takes place on the central order book and how much SEF activity takes place in the request for quotes. It is probably worth mentioning that voice is considered an acceptable mode of execution and therefore - certainly in the dealer to dealer market - we anticipate voice RFQ being a mode of execution that we will use in addition to central order books. Hobson: What about the asset classes being traded? Is every type of swap that we can think of going onto SEFs?

4 4 Best: That is one of the joys of Footnote 88, to be somewhat sarcastic. Everyone was aware that the SEF laws were coming. However, the industry as a whole was anticipating the SEF execution requirements to be sequenced in tandem with the mandatory clearing products. On 16 May, when the SEF rules were voted on, we were all expecting something like 21 products to be pulled into the scope of SEF trading. Footnote 88 initially meant that widened. The impact of Footnote 88 is that the CFTC is effectively saying that anything that will trade on a SEF needs to trade on a SEF from the last compliance date of 2 October, if it is traded in a multiple to multiple environments. That dragged in all the derivatives that the CFTC regulates. Suddenly, we went from G4 linear rates and CS Index to all the other rates, all the other currencies, all the non-linear rates. CDS was pretty much covered but we brought in FX, FX options, NDFs and a whole bunch of commodity products, although they have not necessarily been embraced by SEF trading. Hobson: What is all this unexpected capture of swaps by SEFS doing to the traditional sources of liquidity in these markets, or is it too soon to detect any impact? Findley: It is interesting, because the CFTC goals are a little bit discordant. On the one hand they put out circulars that say that SEFs should really only be trading things where there is a tried and tested way of doing it on an electronic platform. Yet on the other hand they have put in place trading requirements that have not given the industry much time to test. Similarly, it has been very much the goal of the CFTC chairman, Gary Gensler, to increase participation on electronic platforms, yet by not having given the industry quite enough time he has arrived at a paradigm where a lot of firms were saying they were not ready or comfortable to trade. Hobson: Foreign exchange is a large market. Have we seen any impact on liquidity there? Wood: Quite significantly, depending on which asset classes you are talking about. FX is a very different market to rates and credit and, even within credit, there is a big difference between a single name CDS and an index CDS. In terms of how FX swaps - if you want to call them that - are trading on SEFs, a lot of what is trading is no different to what it would have been prior to the launch of SEFs, especially on the D2C side. Best: FX swaps do not have a requirement to trade on SEFs. What we are really taking about is FX options and NDFs. From our point of view, the one asset class where liquidity has been affected is FX NDFs. Almost by definition, FX is cross-border, as is emerging markets. If you put the two of them together with the cross border issues created by the need to get regulatory permissions to operate SEFs in a variety of jurisdictions, you are in some cases just not allowed to offer the platform. There is then a lack of understanding. Try explaining to someone in Asia that all this hinges on a footnote in a 511 page document, and that is the reason why we are asking you to trade on this platform. So we have seen volumes struggle in the NDF market. There is still on-sef/off-sef liquidity but our UScentric NDF markets - the business that takes place in New York - has been very challenged by these rules. Findley: This is one of the places where we start to see extra-territoriality potentially take a bite. For example, rates trading platforms that are offshore feel that if they have US participants on them, they need to register. So a lot of those platforms are bifurcating themselves. They have parts of their platform that are open to US persons and parts that are not. To state the obvious, if you are bifurcating the liquidity pool for US rates products, the outcome is one that is contrary to all of the objectives of the CFTC. It is a good example of the unintended consequence that result when you do things too quickly. Best: As a platform provider, the reason for doing that is not to avoid the SEF rules. It is because you cannot have the same liquidity pool straddling the globe anymore, because of these jurisdictional issues. Hobson: So liquidity is getting fragmented by regulatory accident?

5 5 Callahan: Certainly, that is a potential underlying consequence. It is something that industry groups have been making sure they educate regulators on. We are all hopeful that there is some type of international co-ordination so that there are not bifurcated regulatory regimes creating arbitrage opportunity for global clients. In Asia, one of the main topics clients wants to understand is how the CFTC actions are going to impact them. Unfortunately, at this point in time we all have more questions than answers. Hobson: If Asians are concerned about CFTC actions, what about Europeans? What is the status of SEFs in Europe? Have there been any applications to be a European SEF yet? Best: There have not been any applications yet, or at least not any that I am aware of. The CFTC web site has not been updated since the further measures were announced, so we cannot tell from monitoring the platform, but I would be extremely surprised if there had been more progress. The US created some new rules, so they have got an expedited process of SEF approval in Europe. If you wanted to make an application, you would also have to coordinate with your local regulator. You will have to explain to your local regulator what Footnote 88 is, and all the other rules, and you are going to have get them comfortable with the process. That is going to take longer than the two or three week turnaround time that the CFTC has been managing, because they have imposed a very tight golive timetable. Hobson: We know that 19 SEFs have registered with the CFTC. What is their regulatory status in Europe? Best: You can offer a SEF into the United Kingdom under the overseas person exemption. So as a US platform you can operate in the UK, but you cannot operate that platform directly in any other jurisdiction. So they have no status in Europe and will not be in Europe. Hobson: Are clients comfortable with this degree of uncertainty? Findley: Nobody is ever comfortable with uncertainty, and uncertainty is always bad for business. From our perspective, we are agnostic to which trading platforms our clients would like to use. Some of the things that have happened from a regulatory perspective, like the staff guidance that came out a few days ago, which talks about some fundamental changes to the way the market structure works, create uncertainty. For example, it does not allow futures commission merchants to do a post-execution limit check with clients. That has to happen pre-trade. That conversation about clearing certainty, which has been a big one in the market, is something about which we are very careful. We are very much inherently an applied technology business, and we look at how technology can support what we provide. One of the concerns we had was that the technology required to do a robust, low latency, pre-trade limit check was not where it needed to be. We are confident it will get there, but it is a question of timing. The reason I mention it in this context is that, if you think about the number of SEFs, one thing that is of concern as far as trading venues go is that, if you are a futures commission merchant, and you are forced to do only pre-trade checking of clients, you need to be 100 per cent sure of the robustness of the technology the platform can offer to make sure that it is being done in a way that does not add risk to your firm on the back end as the person that is now guaranteeing that trade, post-trade. By its nature, that is going to concentrate the number of platforms the futures commission merchants are comfortable supporting. Best: There is certainly a risk of that. Also, I think that the way the requirement for clearing certainty is written is problematic. You talk about solutions that might sit between the futures commission merchant and the user of the platform, but no one has yet addressed the issue about who sits between the futures commission merchant and the clearing house. So, even if this process became more robust in terms of credit checking and limit checking between a futures commission merchant and their client, I am not sure the marketplace is even anticipating the development of a solution between the futures commission merchant and the clearing house.

6 6 Findley: They are giving 10 seconds for the CCPs to reject or accept after a trade goes through. They are now saying this should happen as soon as it is technologically practicable. They have used the term void ab initio, which is an interesting legal term meaning from the beginning. In the OTC space in particular it is very unclear what that would mean. If, for example, the trade is executed and goes to the CCP, and the CCP fails to accept it for 15 seconds and then does, is that trade supposed to be void ab initio? What does that mean? Where does the risk lie? It is a very ambiguous space right now. Best: If one of the objectives is to create more robust electronic platforms, how good is an electronic platform that suddenly has to report back that, 10 seconds later, certain trades have been voided and others have not. It does not add up. Hobson: We are entering here the territory of Ping versus Push, with a bit of Hub thrown in. Can you summarise the issues that are at stake here? Bradley: Ping is to make the request pre-trade whether it is on order or on quote for a sufficient credit line for the execution on the SEF before it happens. The trade goes to the futures commission merchant the clearing broker - and presumably also through to the CCP. So Ping is a request in real-time, pre-trade. It is challenging from a latency and a technology and an infrastructure perspective. Push is pre-allocated allocations or carve-outs of credit that are pre-assigned to a SEF that are then drawn down through the trading day. It is easier technically but problematic in terms of things like reconciliation, and ensuring there is not an inadvertent problem where somebody may trade beyond the credit limit they should trade up to. The intention of Hub, as proposed by Markit, is to employ a central, accessible, SEF market-wide source for any SEF or any participant or any futures commission merchant to query as a central database of information. The Hub is systemically problematic, I would assert. Findley: At Citi, we are very much a fan of the Hub concept. A lot of our clients have looked at it carefully. For us, and for our clients, it makes a lot of sense. It would be the central point of connectivity for the industry. You would not have to have direct API access to every platform. It increases competition within the SEF space, which is good, by eliminating the connectivity you have to do. For clients, it could be a very advantageous platform, in so far as they can see their limits across futures commission merchants in one central spot. Hobson: CME is a trading platform and a CCP and a trade repository. Does CME have strong views on the merits of Ping versus Push versus Hub? Callahan: We are working with all the market and industry groups, and it is good that people are trying to find ways to make this work. From our perspective it is a bit easier because we have direct connectivity to both our clearing house and our swaps data repository from both a credit and clearing limits check as well as reporting perspective. Everything is a seamless process. We have true straight-through-processing. So there are no issues there. But, to go back to the point on breaks, hopefully most if not all of the client failures that are experienced due to the 10 second rule can be fixable by modifying the account or talking to the clearing member to adjust the limit, or just trying to clear the trade via the clearing member itself. In our staff rule book we have a 15 minute window to work with a counterparty to try and get the trade submitted via another method. After that it is fully voided. So there is certainly more work to be done there, but we have done a lot of thinking about how the clearing side and the futures commission side fit together. Best: I would suggest that the 10 second ab initio rule just voids all of the good work you as a clearing house have done to try and triage trades that might fail for clearing because they just said, 10 seconds, and the trade never existed in the first place.

7 7 Callahan: To a point, yes. When you talk about 10 seconds on a stand-alone basis, that is fine for us, because we have been doing real-time clearing for many years. It has always been one of our selling points against our competitors that we can clear trades in real-time, and it has never been an issue. Even if a trade is voided ab initio, there is a desire for the counterparties to have a cleared trade and, even though it is voided, there is some appetite to have a process to get that exposure back on the books the way the counterparties originally intended. Findley: The 10 second rule is a good example of the regulators not appreciating at granular level how things in the market are actually functioning. It relies on a misapprehension that trades are never going to fail to clear. Actually, trades fail to clear all the time in the current environment. The idea of a low latency environment where you have an ab initio trade, and you just put the risk back on, is completely opposite to the experience we have had so far, where you do have clearing houses rejecting trades, and we are often relying on replay mechanisms where we work with the parties involved to get the trade re-submitted for clearing in a reasonable period of time. Hobson: It sounds to me as if the 10 second rule is of some competitive advantage to CME as it has the internal connectivity? Best: My understanding is that the clearing house may well be able to do real-time clearing. All clearing houses are moving towards real-time novation. The question is, Is there enough margin already being held? Often, extra margin has to be posted. That is where you get uncertainty. Hobson: How are fund managers going to document these trades? Callahan: When you look at the new world of documenting a trade, each SEF has its own participant agreement and its own rule book. Whenever a trade is done on a SEF, the actual SEF will send a legal confirmation document to the counterparty, so this effectively becomes the new confirmation for that trade. Once the trade is cleared, it is governed by the clearing house rule book. Hobson: What reporting obligations are fund managers assuming when they trade on SEFs? Callahan: From my standpoint, the SEFs are responsible for reporting trades to swap data repositories (SDRs), and the clearing house is responsible for sending the matching details to the depository once the trade is cleared. Best: As a SEF provider we have to handle the trade reporting from a real-time reporting and a primary economic term reporting point of view. There is some continuation reporting, and then it gets a little bit trickier. If a swap dealer is involved in the trade, then the obligation to continuation report which is really keeping the trade life cycle up to date with the SDR - falls upon the swap dealer. If there are two swap dealers in a trade then there is a process to determine which of them should do it. If there is a swap dealer to an end-user, then it is the swap dealer. I supposed the edge case would be end-user to end-user. Findley: Under the EMIR construct, to the extent that you have a SEF that is providing a service to non-us clients in Europe, reporting is very much an open issue. Even in that space there have been questions asked about a possible deferral of reporting requirements, and whether or not it is going to be two-party or single party reporting. Obviously, we do not yet have the concept here of swap dealers in Europe, so that is a space, as far as the EMIR reporting goes, that is still uncertain. Hobson: A surprisingly large number of fund managers are still under the impression that their clearing brokers are going to do the SDR reporting for them. If the SEFs and the clearing house are going to be doing it, are they simply mistaken? Findley: Yes. Generally speaking, the SEFs and the clearing houses are going to do the reporting.

8 8 Hobson: How will clearing arrangements work for fund managers? Are they going to differ between SEFs or will they be standardised? Wood: Between SEFs, for a given CCP, the treatment of clearing will be the same for each specific product. Once pre-trade clearing certainty has been attained, how clearing is affected between the CCP and the clearing broker will be SEF-agnostic. Callahan: At CME on the clearing house side, we have 16 different trading platforms connected to us. Most of them are SEFs, but some of them are just legacy affirmation platforms. But from our side we are truly agnostic as to how the trades are submitted to us. We just view all trades the same way. I guess, in the new world post November 1, there will be different work flows where the SEF trades. But, effectively, there is no longer a need to approve credit after the trade comes to us from a SEF, because the assumption is the trade was already approved pre-execution. Post November 1 there will be different workflows for SEF trades as opposed to trades that come to us from a non- SEF platform. Hobson: Clearly, there needs to be links in place between SEFs, clearing brokers, CCPs, trade repositories and endusers. A vertically aligned provider such as CME, which incorporates a SEF, a clearing house and a trade repository, has some competitive advantage in terms of internal links. But not all of the clients of a clearing broker are going to be doing everything with CME. Will the clearing brokers provide the horizontal connectivity between SEFs and CCPs? Findley: In terms of the clients getting their part of the trade into the CCP, that clearly does come down through the clearing broker. We have the on-boarding documentation that we have with a particular client. We then have the connectivity to the various CCPs. The client sends in the trade via the SEF platform, and we would then be responsible for putting their half of the trade in to the CCP. Wood: So the trade is effectively given up to the clearing broker, and the subsequent clearing and settlement process is facilitated by the clearing broker. Findley: Correct. Hobson: What is the financial liability which the client has towards you as the clearing broker? The client obviously pays you fees and sends margin, but what financial liability are they assuming when they appoint and use a clearing broker? Findley: Even though here in Europe it is very much a principal-to-principal model, or what some people sometimes call the SCM model as opposed to the FCM model, or under the FCM model in the US, since we are talking specifically about SEFs, in either case it is an asymmetric relationship. Generally speaking, you are calling the client to obtain the margin the clearing house has called for, perhaps with some additional extra amount, depending on the financial robustness of the particular client. Then there are some different types of fees that are charged by the clearing broker. But there are no specific liabilities. In fact, the client is able to port away from a particular clearing broker if they get into financial distress or they just want to rebalance their portfolio. Hobson: As we discussed, there is no obligation on a fund manager to use a SEF. What would be your advice on choosing between the different means of executing swaps? Findley: I am sure the clients represented on this webinar will have a much more robust view of what is appropriate for the execution needs than anything I can provide. Obviously, different platforms meet different needs for clients. There will be different liquidity profiles they can access bi-laterally versus different platforms. Some platforms will offer better mousetraps than other platforms. That will clearly evolve. Right now, what we are hearing is that a lot of the clients have taken a little bit of a wait-and-see approach. They would like to make sure that the technology is

9 9 where it needs to be before they are on platforms and before they are running through this highly automated wave of getting trades into clearing. Hobson: Clearly, we are in a transitional stage, rather like multi-lateral trading facilities in the cash markets after MiFID 1. How long are single dealer platforms going to survive? Best: Speaking for the European landscape, I see no reason why they will not survive until at least the MiFID 2 rules come in. There is nothing in the extra-territorial applications of the SEF rules that requires an end-user to trade on a SEF. There is nothing that puts the single dealer platforms into a compromised state, so it will be business as usual for them. There is a lot of work still to be done before there is real end-user comfort with regards to all the change. So I think there is certainly mileage in single dealer platforms in Europe. I am not sure about the US so much, because I think there are more constraints on US participants in the US when the required determinations take place. Hobson: If you were advising a fund manager on how to go about choosing a clearing broker, what are the criteria that you would put into that calculation? Wood: It is a good question, but not an easy one to answer. A lot will depend on the nature of the client. Is it a hedge fund? Is it a pension fund? Or is it something in between? How frequently are they trading? What are they trading? What kind of access to what kind of liquidity do they need? To the point about single dealer platforms, we are seeing at least one case in which a sell-side broker is making available SEF aggregation available over a single dealer platform. You can call it a single dealer platform, even in that case, but effectively it is an agency-type model where a client can log on to a trading platform that the broker provides and access liquidity aggregated across more than one SEF. So we are seeing a case where that is happening. What should a buy-side fund manager need to consider when looking for execution SEF locations or trading platforms? Whether they want to connect directly or give up their trades, or whether the nature of their business means they are quite happy to trade through a single dealer platform or similar type of offering. I think these days that clients are lot more interested, not only in the execution capability that their broker can offer, but all of the value surrounds the so-called client stickiness elements that a particular broker can make available. If I am a hedge fund, and all I am interested in is accessing as much liquidity as possible over a FIX connection that is one type of requirement. If I am a pension fund, or I am a more traditional asset manager, and I want to utilise other types of tools charting, research, etc. then I may have a different view. There is no one right answer, in terms of picking your executing broker or your clearing broker. Findley: I can weigh in there. The execution question is less certain. On the clearing side, clients have become a lot savvier than they were a couple of years ago. Clearly, the level of service they receive, just like any other servicedriven business, is going to be a big part of it. But financial robustness is a big part of it too. When you look at the level of requirements to be a clearing member, they are not always necessarily commensurate with someone you might want to have as an intermediary for you on your trading. Certainly, when you look at EMIR, around the segregation models that are available to clients, and you look at gross omnibus solutions versus individually segregated solutions, those will have different costs associated with them. You may, for example, be a lot more sanguine and open to being in a gross omnibus model if you have a very robust clearing broker than if your broker is a lot less robust, because those things only come into effect once you have your clearing member actually in default. So I do think there are legitimate differences between clearing brokers. I also think we are in a little bit of green fields right now, where you do see clearing brokers, in some cases, competing on terms that I would suggest are not necessarily scalable once you advance them to thousands of trades or hundreds of clients, once we have mandatory clearing in Europe. We saw a lot of that two or three years ago in the United States as well, where you would see some market participants looking to compete by offering levels of pricing that are not sustainable across a broader market base.

10 10 Wood: The other thing I would add to that is, if I am buy-side, I would be interested in seeing how my clearing broker can manage my collateral or margin obligations across all the CCPs that I may wish to have as a counterparty to my trades. Can they manage cross-margining? Can they extend prime-like services as and when I might need them to enable me to trade the way I like to trade without having to deal with the pain of the administrative overhead of having to deal with margin calls and such like? One of the things that occurs to me is, are crossmargining capabilities made part of an offering from my clearing broker? Hobson: It sounds like the choice of broker is driven more by the clearing than the execution side. Is that a valid approach? Callahan: Relationships between customers and their prime brokers clearly matter. When you go to many buy-side shops, especially hedge funds, the execution side has a very strong say as to who those relationships are. There are others where the COO or CFO has a bit more power in relation to the legacy prime brokerage relationships, so the calculus in terms of our customers attitude to their brokers is all over the map, but certainly the execution side is heavily involved. This is an edited transcript of a live webinar broadcast on Monday 7 October A filmed version of the interview can be found at