The International Swaps and Derivatives Association (ISDA) has voiced disagreement with recent rules that dictate a minimum number of quotes market participants must seek when trading on new swap execution facilities (SEFs).
Following the Commodity Futures and Trading Commission's (CTFC) adoption of a proposal last Thursday to mandate that market participants make two requests for quotes (RFQs) on SEFs, rising to three in mid-2014, ISDA questioned the very logic behind dictating RFQs.
CFTC rules on SEFs, part of the Dodd-Frank Act's Title VII on OTC derivatives market reform, had been delayed several times before last week's meeting and have proved highly divisive.
ISDA said the assumption that a set number of quotes would benefit the market is incorrect, and signifies a failure to understand the complexities of the market and the role of RFQs in helping market participants make an investment decision.
In a briefing note, ISDA said: "Why? How or why is it 'good' to mandate that a derivatives user request a certain number of price quotes from different dealers? And why five?
"Shouldn't this be up to market participants to decide? Particularly since getting a quote is easy enough, given the different ways derivatives users can get or check prices (via phone, terminals, and dealer, broker and other trading systems)?"
ISDA said the CTFC has made a flawed assumption that clients are not qualified to decide for themselves how many quotes are needed.
It also claims the regulator has ignored the value of information to market participants, noting that RFQs can provide valuable information which clients may not wish to offer to any more counterparties than is appropriate.
ISDA has also questioned the presumption that changes to trade execution rules will do anything to reduce risk to the financial system. The trade body said trade execution rules will only influence market structure, not system risk, and believes regulators should be focusing on other areas to address this.
However, trade technology provider Fidessa says this compromise by the CTFC, along with others, will help to progress the electronic trading of swaps despite the controversy surrounding SEFs.
Mark Brennan, senior business analyst at Fidessa, wrote in his blog: "The Commission has reiterated the commitment to transparency and openness in swaps trading envisioned by the Dodd-Frank Act, enumerating that SEFs need to 'provide impartial access to their markets to any eligible contract participant and any independent software vendor.'
The impartial access model should result in the swap market structure changing profoundly, according to Fidessa, and many SEF entrants and other players will be able to converge in the electronic trading ecosystem.