Swap execution facilities (SEFs) have been given the go-ahead after the US Commodity Futures Trading Commission (CFTC) passed final rules on OTC derivatives trading, including dropping the number of bids buyers must request to three.
The US derivatives regulator yesterday voted 4-1 on the core rules governing SEFs, forcing buyers to request at least two bids when trading swaps for the first 12 months - the number will then rise to three.
The new rule has been labelled a compromise for the CFTC, which initially proposed a minimum of five quotes. The initial proposal had been met with disapproval by market participants on grounds of information leakage.
Alex McDonald, CEO of Wholesale Markets Brokers' Association (WMBA) said the rules on the number of quotes requested were based on methodologies relevant to specific instruments such as credit default swaps and interest rate swaps.
"But there are many other instruments for which getting a quote can be difficult and flexibility is required," he said.
Timothy Cameron, managing director and head of SIFMA's asset managing group, said the minimum-bid requirement would "tie the hands" of investors.
"Requiring portfolio managers to broadcast their trading position more widely than they would otherwise choose could negatively impact the prevailing price of their trades, making it more expensive and difficult to hedge their clients risk," he said.
The Commission described its rules as "technology neutral," and has allowed future SEF operators to blend traditional voice broking activity with electronic trading on the platforms.
A two-period phase-in has been set up for minimum block sizes - a threshold for when trades are large enough to be reported with a delay. For the first year, the minimum block size will be calculated using a 50% notional amount calculation. It will then go up to 67% after one year.
The WMBA's McDonald said these rules left the door open to a further futurisation of swaps that has developed since October.
"US energy swaps have migrated almost entirely into a futures blocks regime, so any radical shifts in block trading rules will impact liquidity and could drive regulatory arbitrage."
The final rules on SEFs will become effective 60 days after its publication in the Federal Register. Market participants will then have 120 days to comply.
Yesterday's vote was a milestone. The rules are aimed at moving a large proportion of OTC trading activity to SEFs to comply with the Dodd-Frank Act, which was signed into federal law in 2010. The legislation also requires swaps to be reported to trade repositories and centrally cleared.
The final CFTC rules come after numerous delays and were originally expected last autumn, then again in February - only for further difficulties to arise.
The Commission angered market participants with some proposals, including Bloomberg, which intends to launch a SEF. The data vendor is suing the CFTC on ground that rules requiring a lower initial margin payment for swap futures compared to cleared swaps may limit liquidity on SEFs.
Bloomberg yesterday said it was "pleased" the CFTC had come to an agreement on SEF rules. Other companies looking at running SEFs include MarketAxess and Tradeweb.
Zohar Hod, global head of sales at SuperDerivatives, a cloud-based data and technology service provider, said all eyes were now on the 20-plus SEF-hopefuls.
"Many have been claiming they were ready for months, and they now control their own fate," he said.
"The majority of the large swaps dealers have been preparing for this since 2010, but medium and smaller buy-side firms and non-financial participants, such as asset managers and corporations, now face a race against time to comply."