Data vendor Bloomberg is preparing to launch a US trading venue for over-the-counter (OTC) derivatives – also known as a swap execution facility (SEF) – as it looks to capitalise on strong growth in fixed income volumes.
“We are working with regulators to determine what SEF registration will entail,” George Harrington, global head of credit for the Bloomberg Professional service, told theTRADEnews.com. “Registration won’t be considered for another three or four months, until the rules have been finalised, but we are following the situation very closely.”
Bloomberg plans to start listing credit default swaps (CDSs) and interest rate swaps, but could extend the product range to include commodity derivatives and equity total return swaps, subject to customer demand.
The firm will need to register with, and gain regulatory approval from, the Securities and Exchange Commission (SEC) – which deals with security-based swaps ¬– and the Commodity Futures Trading Commission (CFTC), which handles interest rate swaps, as well as derivatives based on physical assets such as commodities and currencies.
The US regulators are currently devising rules to reform the OTC derivatives market. This includes migrating as many products on exchange as possible, mandating central clearing and improving transparency of exposure using data repositories. The new rules need to be finalised by 15 July, from which time the industry will have 90 days to implement them.
The firm is considering using both a request-for-quote (RFQ) and central limit order book system. Under the current CFTC proposals, those using a RFQ system will be required to source quotes from a minimum of five dealers, while the SEC has no such restrictions. While he notes that there will be an added compliance burden from having to register with both regulators, Harrington says that meeting technical challenges will be relatively straightforward.
According to Harrington, clients have so far favoured the RFQ model. “The general feeling among clients is that they can better control the amount of information they expose to the market using the RFQ model,” he said. “However, as electronic trading of OTC derivatives starts to evolve, we anticipate the central limit order book model to grow in popularity.”
As of 17 March, Bloomberg reported that it had traded over US$1trillion worth of electronic interest rate swaps and credit default swaps so far this year.