The credit default swap market inched closer to an exchange-like format this week as a second platform began facilitating electronic trading of single-name CDS in a central limit order book structure, part of a widespread shift away from bilateral voice trading.
MarketAxess has expanded its MATCH trading platform to allow an expanded set of buy and sellside participants to view bids and offers on an open, centralised screen.
In the US, trading of index CDS contracts is set to be mandated for trading on swap execution facilities in February, while there is no date set for the trading of single name contracts on electronic platforms.
“We believe that a centralised all-to-all marketplace, offering a variety of trading protocols, is an effective way to increase overall credit market liquidity,” said Kevin Mcpherson, head of US sales at MarketAxess in a statement.
“Alongside our SEF for CDS index trading, MATCH will help to further increase transparency and broaden participation in the CDS market.”
The platform is the second iteration of efforts to facilitate single-name trading in electronic format. UBS launched its Price Improvement Network in January of 2012, a platform that allows buyside firms to trade single name and index CDS with one another without necessitating dealer involvement.
The platform received support in the early days but has stalled of late partly because the firm decreased its presence in the CDS market as part of a wider pullback from fixed income last year.
MarketAxess will list all 225 constituents of the Markit CDX North American Investment Grade and High Yield indices, along with 50 additional financial names.
Barclays has signed on to act as primary market-maker behind the trades, countering any buy or sell requests to “ensure the availability of continuous two-way markets on the platform,” according to a statement.
“I see this as an opportunity for us to give more certainty to clients to execute CDS trades at the time they want to than would be provided over voice,” said Bob Douglass, head of credit electronic trading at Barclays.
The migration from voice-trading to exchange-trading for CDS is an inevitable one that is running on two separate tracks. Trading of index CDS has largely migrated to a host of main platforms now able to call themselves SEFs under the new regulatory regime. Bloomberg, Tradeweb, the InterContinental Exchange, and GFI Group have been the dominant players executing trades over the past few years, according to market participants.
The CFTC mandated the platforms come into compliance with new swap execution facility rules to continue executing index CDS electronically this autumn but will not force market participants to be in compliance with SEF trading until February.
The SEC is in charge of mandating single-name CDS for on-exchange trading but has not yet laid out a timeline for the change.
The platforms may also be in line to gain from increasing volumes in the CDS market after a perceived heavy lull following the credit crisis. Average monthly volumes in index and single name CDS combined for 2012 came in at US$138,236bn notional, higher than the 2011 monthly average of US$136,021bn, according to data provided by the Depository Trust and Clearing Corporation. Additionally, gross notional outstanding in 2013 is on pace to peak both prior years through July, according to DTCC data.
The migration to exchange trading represents a major shift, but questions still remain regarding which type of format the market participants will prefer.
MarketAxess hopes the MATCH platform will encourage more buyside participation with other buyside firms in the single-name space, an idea shared by the engineers of UBS’ PIN-FI platform.
In the index space, Tradeweb began allowing dealers to see each other’s prices in the European interdealer market in an order book format earlier this year. The alteration led to a sea change in liquidity at the time as participants flocked to the platform. (See story “Tradeweb revolutionises CDS” IFR 1975 16 March to 22 March 2013)
In the US Tradeweb’s SEF volumes for index CDS have lagged of late though, with the firm only executing 385 credit contracts in the last three weeks, according to software and research provider ClarusFT.
Over the same time period, ICE has executed over 3,000 trades, Bloomberg has executed over 50,000, and GFI has executed over 18,000, according to Clarus.
The separation of dealer-specific liquidity pools from client-facing pools may be a thing of the past though, after the CFTC solidified a rule requiring SEF platforms to provide impartial access to its liquidity pools to all market participants without bias.