As the new Dodd Frank-created derivatives market was discussed, it soon became clear that just about every market participant out there wanted to become a swap execution facility (SEF), which struck us as mini-trade aggregation platforms. They were designed to create a set of powerful new competitors to the powerful dealers that dominate the market.

But even before the new order has come to life--the wrangling is still going on--the heyday of the SEFs seems to be over. Many people are taking about a market shakeout, even though there is no market! Truly, the modern investing industry moves fast. The fact is that it is not likely that the new derivatives market will be able to support so many SEFs. So some sort of consolidation will likely happen ahead of the day when these entities actually open for business.  

The Financial Times notes that Marketaxess, a well-known participant in the CDS and electronic bonds markets that was considering registering as an SEF, may be considering strategic options, which might include some sort of merger. These talks seem to be in its early stages, and this may be something of a trial balloon. But the more than 40 entities mulling SEF status are no doubt watching. Some of these entities may band together, or we may see more dealers snap up SEFs.

This would appear to run counter to the intent of Dodd-Frank, but that's not going to stop the dealers. They might be onto something, especially as end customers may feel more comfortable maintaining their relationship with their dealer. Dealer-owned SEF platforms may be one answer.

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