If Advisors Must Use SEF's, Should I Execute Directly With the Bank?

Background

If some of my banks are not on the SEF, should I just execute directly with them??

Derivative markets are historically opaque; it is best not to go alone

The information asymmetry between banks who are in the financial markets each day and companies who are producing or consuming commodities is dramatic. It is extremely difficult for the average company to truly understand forward markets, volatility surfaces, credit charges, and the like. And when information is in one party’s favor, they almost always win.

Hedge advisors have invested in information and tools that close this information gap. And they see market pricing opportunities broadly via interactions with dozens of banks each day.

As a result, hedge advisors give you the best opportunity to receive a fair market price.

Hedge advisors that execute hedges on a SEF have an added technology advantage. By distributing pre-trade communication simultaneously, collecting bids and offers in a central location, providing real-time rankings to banks, and having an efficient execution mechanism, these CTAs can quickly respond to price movements and lessen the chances of front-running.

Assessing Information Asymmetry

Before going directly to a bank to negotiate a hedge, please ask yourself:

1. Do I have the technology to solicit bids/offers across multiple banks?
2. If not, how do I know if I am getting competitive pricing?
3. If I need to call other banks, will the bank hold its bid/offer until I am done with my calls?
4. Can I simultaneously query as many counterparties as I choose for equal and wider participation?
5. How do I know the mid-markets I am getting are precise and accurate?
6. What will I use to verify the confirmations I receive are accurate?
7. How will I get the trade details to a 3rd party so they can be recorded and valued?
8. What will I use to verify that the ultimate settlements I receive are accurate?

In short, any company can call a bank and get a price. Knowing the price is fair is a different story. There are very few places in life where you would accept a non-competitive bid. Don’t make hedges that impact your company’s P&L one of them.

Reference (links)

		Which parties are involved in a hedge transaction?
		Are hedge advisors necessary?
		Are SEF fees appropriate?
		Will AEGIS SEF create conflicts with the original AEGIS business model?

About the AEGIS SEF

AEGIS SEF (US) LLC, a subsidiary of AEGIS Hedging Solutions, is a Swap Execution Facility approved by the Commodity Futures Trading Commission (“CFTC”). AEGIS SEF operates markets for commodities, interest rate swaps and other instruments. AEGIS SEF offers a venue for trading in uncleared bilateral OTC swaps through a central limit order book (CLOB) and request for quote (RFQ) system. For more information, please go to https://aegis-hedging.com/swap-execution-facility. The AEGIS SEF is headquartered in The Woodlands, Texas.

Commodity interest trading involves risk and, therefore, is not appropriate for all persons; failure to manage commercial risk by engaging in some form of hedging also involves risk. Past performance is not necessarily indicative of future results. There is no guarantee that hedge program objectives will be achieved. Neither this trading advisor nor any of its trading principals offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program. The Commodity Futures Trading Commission does not pass upon the adequacy or accuracy of this Advisor’s disclosure and has not reviewed or approved the contents of this webpage.