Final rules on how OTC derivatives will be traded under Dodd-Frank could be revealed next week, with the US Commodity Futures Trading Commission (CFTC) scheduled to discuss key reforms.
The US derivatives regulator yesterday announced it is to hold a public meeting on rules for swap execution facilities (SEFs) and minimum block sizes on 16 May, potentially ending a string of delays since rules were first proposed by regulators more than two years ago.
The derivatives section of Dodd-Frank Act, which was signed into federal law in 2010, aims to move a large proportion of OTC trading activity to exchange-like venues, known as SEFs, as well as imposing new reporting and clearing requirements on market participants.
The CFTC has been mulling over derivatives proposals for some time and was expected to finalise rules on SEFs and minimum block sizes last autumn, before pushing the deadline to mid-February – only for further difficulties to arise in the framing of the final rules.
Market participants have spoken against CFTC rules, with Bloomberg last month filing a lawsuit against the Commission. The data vendor, which intends to launch a SEF, believes the requirement of a lower initial margin payment for swap futures compared to cleared swaps may limit liquidity on the new facilities.
The CFTC has refused to comment on reports that commissioners are considering reducing the number of price quotes a buyer must request before trading swaps on a SEF from five to two. The original proposal obliging customers to request five quotes was met with disapproval by market participants on grounds of information leakage.
US buy-side trade body Investment Company Institute welcomed suggestions of a drop in the number of quotes.
“Fund managers are well suited to determine the number of dealers to whom the send a request, and remains concerned about any regulatory requirements that could lead to information leakage and increase the potential for front-running, resulting in higher trading costs for investors,” it said.
“Providing more flexibility to investors in the swaps market would benefit investors and, consistent with the intent of the Dodd-Frank Act, would encourage swap trading on SEFs, instead of reducing liquidity and pricing efficiency.”
Will Rhode, director of fixed income research at TABB Group, said having institutions seek five quotes makes it difficult to trade in size.
“It’s less about competitive bidding and transparent pricing, it’s more about the fact that if you open up to more than one bidder, what you effectively do is force trade sizes to come down,” he said.
“If the intention is to make markets more efficient and open it to competition, than I don’t think RFQ-to-five achieves that. For the sake of the continued functioning of the market, with all of the benefits that it has, then RFQ-to-two is the way to go.”