We recently attended ISDA’s DerivCon in New York, a day’s worth of discussion on industry topics from industry leaders and market participants from regulators, banks, and others. Here are a few thoughts.
Swap Execution Flexibility remains an issue
CFTC Commissioner Brian Quintenz expressed the view that the CFTC’s 2013 decision to prescribe execution methods substituted its judgment over the expertise and judgment of market professionals, and, more importantly, is not supported by the Dodd-Frank Act.
ISDA CEO Scott O’Malia highlighted in his opening remarks that the limitation of swap execution methods to a “Central Limit Order Book (CLOB) and request-for-quote-to-three (RFQ-3)”, when considered ‘required transactions’, as set out by SEF rules, remains an industry concern. This issue is an area which is currently being considered through CFTC and SEF proposals and attempts to provide increased execution flexibility in frameworks.
The majority of swaps are currently traded on SEFs, however O’Malia referenced illiquid swaps and bespoke swaps as instances which may require multi-party negotiation and be better suited to off-SEF trading possibilities and flexible execution.
Quintenz detailed that current proposals would eradicate the “broken” Made Available to Trade (MAT) process and remove the burden of maintaining CLOB trading functionality, despite minimal adoption of the execution method.
He further referenced that proposals will permit SEFs to offer any method of execution “so long as the SEF offers ‘multiple-to-multiple’ trading”. This would authorize the use of ‘auction platforms’ and ‘flexibly-conducted trade work up sessions’ which may offer opportunities to create liquidity for sporadic swaps, while also allowing the CLOB and RFQ-3 to continue to be used if desired – thus offering greater execution flexibility.
Others commented that should proposals be enacted, competitiveness in SEF markets will increase based upon execution offerings and ability to facilitate liquidity.
Trading Across Borders
The day also saw a panel discussion on the need to look at all forms of necessary equivalency between territories.
The panel raised the issue that Multilateral Trading Facilities (MTFs), Organised Trading Facilities (OTFs) and Swap Execution Facilities (SEFs) haven’t changed their systems to provide a holistic offering to meet the differing reporting requirements required by various authorities.
A comparison of MTF/OTF versus SEF clearing models and order flows was presented to attendees highlighting that SEF order flow processes may lead to problems meeting MIFIR transaction reporting requirements, while MTF/OTF similarly requires adaptation for US users to meet their reporting requirements.
Amir Zaidi of the CFTC informed attendees that the CFTC is currently assessing reporting requirements as a part of harmonization efforts.
A theme raised during this panel discussion was the realisation that in the face of a range of reform projects, market participants need to find commonality among projects. Regulation in the shape of the EU-enforced Central Securities Depositories Regulation (CSDR), the Financial Industry Regulation Authority (FINRA) Rule 4210 on margin requirements, as well as uncleared margin requirements all have their own timeliness requirements with regards to compliance, but finding commonality could lead to resource savings in compliance efforts.