29 October 2015

Hedgeweek: Interest rate derivatives trading going electronic, but investors still value sell-side relationships

The business of trading interest-rate swaps is moving to electronic platforms at breakneck speed, largely driven by the implementation of Dodd-Frank. But according to a new study from Greenwich Associates, investors are still relying on the support and advice of sell-side salespeople

A new Greenwich Report, Interest-Rate Derivatives Sales: Not What It Used To Be, But No Less Important, reveals that as recently as 2010, nearly 90 per cent of notional trading volume was executed via the phone, instant messages and email, with only the remaining 10 per cent directed to electronic platforms. At that time, only 17 per cent of US-based investors traded any interest-rate swaps electronically, a number that has since jumped to almost two-thirds.

Despite this shift to electronic trading, investors continue to place a high value on the service provided by sell-side interest-rate derivatives (IRD) salespeople. In fact, US investors allocate one-third of their trading volume based on the quality of the sales coverage they receive, putting sales on nearly equal footing with execution quality, which on average drives 44 per cent of volume allocation.

“Immediately following the financial crisis, investors started relying on sell-side salespeople for education about regulatory changes, new clearing rules, SEFs, and how to make the transition to electronic trading,” says Jasper Clark, Greenwich Associates Associate Consultant and author of the report.

A critical role of the IRD salesperson today is focusing on large and complex transactions. Block trades, which above a certain size are not required by regulation to be executed electronically on SEFs, represent a key area where sales can continue to add value and, in turn, influence allocation decisions.

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