QIC first Australian buy-side firm to execute on a Sef

Brisbane firm executes on Sef despite not being mandated to do so in order to guarantee access to liquidity

Queensland Investment Corp HQ in Brisbane

Queensland Investment Corporation (QIC), the A$79 billion ($72 billion) fund manager, has become the first institutional investor in Australia to execute a trade on a swap execution facility (Sef) with a US dollar interest rate swap trade it put through on Bloomberg today.

Sef trading is gaining momentum following the regulatory requirement for US parties to execute certain swaps including US dollar interest rate swaps on Sefs as of February 15, 2014. According to data provider Clarus Financial Technology, one-third of USD interest rate swaps are now being executed on Sefs with total notional of $720 billion in the week of March 3–7.

For buy-side participants, there are two ways to access Sefs: by becoming a direct member or via an "umbrella service" provided by a broker which will allow participants to plug into the platforms. QIC has chosen to sign up directly to a Sef, a process that has taken around four months to complete.

According to Andrew McMaugh, senior legal counsel at QIC in Brisbane, this process required the asset manager to agree a series of protocols in addition to submitting to the rule process of the Sef itself.

"In order to trade on Sef you need to agree with your clearing broker how pre-trade credit checks will occur when you execute on that platform, that you are operationally capable of putting trades into that facility and, in the event you're not mandated to trade on Sef that you understand the rationale for doing so," he says.

For some buy-side firms this can be a challenge in terms of infrastructure and connectivity, he says.

"It depends on where you start from in terms of scaling the Everest that is central clearing and Sef trading. In terms of knowledge and expertise, we feel that as a firm QIC is well entrenched at base camp insofar as we are actively clearing and have formed a view over the rationale for doing so and for trading on Sefs. For firms that may not yet be clearing it may prove to be challenging to try and scale Everest if you're setting out from sea level."

Trading on Sefs will help trade reporting and best execution practices, says Nick Horn, senior investment risk analyst at QIC, but he says that gaining access to all pools of liquidity was the main driver to trade on the platforms without being mandated to do so by regulators.

"Considering the broad nature of the instruments and counterparties that we trade with, we decided to explore Sef trading early to maintain access to relevant liquidity pools on US instruments, even though we are not mandated to execute on them at the moment," he says.

Despite reports of Sef-induced splits in liquidity, Horn has not seen a distinction in pricing between the two types of trade.

"There is evidence within data we have seen that an increase in Sef trading is underway, but not to the extent that it has become detrimental to trade off-Sef at this point in time. Although this component of market infrastructure is in the early stages of adoption, we are comfortable with the operational aspects involved in securing broader access to liquidity pools," he says.