With the U.S. ecosystem for swap execution facilities continuing to evolve, Bats Global Markets, Inc. (Bats: BATS), the Lenexa-based operator of the U.S second-largest stock exchange, today announced its plans to acquire Javelin SEF, LLC (Javelin), a Swap Execution Facility (SEF).
The transaction is pending regulatory approval and the deal terms will not be disclosed.
Javelin SEF, LLC is a swap execution facility that offers liquidity and execution choices in a wide range of interest rate swaps. Bats said the deal is intended to accelerate its plans to offer trading of non-deliverable forwards (NDFs) for the foreign exchange market.
Commenting on the news, Chris Concannon, CEO of Bats Global Markets said: “Our acquisition of Javelin underlines our commitment to the FX market and is an acceleration of our FX product rollout plans. The transaction will enable us to broaden the instruments available to trade on Bats Hotspot, adding to the platform’s existing product line-up.”
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SEFs and NDFs
NDFs are cash-settled, short-term forward contracts in a thinly traded or nonconvertible foreign currency like the Brazilian real, Chinese renminbi, or Indian rupee, against freely traded currencies, like the U.S. dollar. The profit or loss at the settlement date is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time of settlement. The gain or loss is then settled in the freely traded currency.
Non-deliverable forwards (NDFs) have experienced impressive growth in recent years. According to the latest Bank for International Settlements (BIS) triennial survey, total NDF daily turnover was $127 billion, as of 2014, around 19% of all forward trading globally and 2.4% of all currency turnover.
In terms of SEFs, they are trading entities that clear OTC products, such as OTC interest rate and credit swaps under the CFTC’s regulatory oversight. The new facility emerged out from the Dodd- Frank Act and Consumer Protection Act of 2010 which deemed NDFs as a financial instrument requiring mandatory clearing, providing greater pre-trade and post-trade transparency to the swaps market.
The US watchdog has issued recently a series of orders granting registration to a large number of platforms to operate as Swap Execution Facilities, better known as SEFs. However, much of the trading volume in this realm is still concentrated among a few big players. The list includes ICAP, BGC Partners, Tullett Prebon, CME Group, ICE and Bloomberg, with the latter capturing nearly 50 per cent of plain vanilla swap trades last year.