MarketAxess, a electronic trading platform for corporate bonds and other fixed income instruments, including credit default swaps (CDS), has responded to a request for public comment from the Securities and Exchange Commission (SEC), the US regulator, urging the adoption of a streamlined regulatory model for securities–based swap execution facilities (SEFs).
“By imposing on securities–based SEFs rigid, exchange-like self regulatory obligations for infrastructure and discipline, among other requirements, the SEC would erect unwarranted and formidable barriers to entry for securities-based SEFs,” wrote Richard McVey, chairman and chief executive of MarketAxess.
SEFs are being developed to meet with the Group of 20 requirement that all standardised OTC derivatives be traded on a venue by the end of 2012. The SEC is responsible for rules governing SEFs that allow trading of securities-based swaps, while the Commodity Futures Trading Commission (CFTC), the US derivatives regulator, is responsible for SEFs that allow trading of swaps based on interest rates, commodities and currencies.
On 3 February the SEC proposed core principles and attributes for SEFs that deal in security-based swaps and derivatives, such as credit default swaps. A SEF is defined by the SEC as a type of “system or platform that allows more than one participant to interact with the trading interest of more than one other participant on the system or platform”.
The SEC has said SEFs could take the form of a request-for-quote (RFQ) system or a limit order book system, and that there is no limit on the number of quotes required for RFQ systems, unlike the CFTC, which said that participants using must source quotes from at least five liquidity providers.
In its letter MarketAxess advised that, rather than treating securities-based SEFs as the equivalent of exchanges or self-regulatory organisations they should be treated as alternative trading systems, US-based non-exchange securities trading facilities.
“Congress envisioned securities-based SEFs and SEFs as new competitive alternatives to national securities exchanges and designated contract market that would be able to operate in a lesser-regulated environment where professional and sophisticated market participants could transact in securities-based swaps and swaps when advisable or mandated by the SEC or the CFTC,” wrote McVey.
MarketAxess also voiced support for the SEC’s interpretation of the securities-based SEF definition that would allow an RFQ to be submitted to just one other market participant; the policy allowing temporary securities-based SEF registration as long as certain of the securities-based SEF core principles are met; the SEC to judge as to which security-based swaps are “made available to trade” on a securities-based SEF, and the minimum size for securities-based swap blocks. It said that latter should be guided by market participants' concerns regarding both the timing of the reporting of block trades and the determination of the size for qualifying block trades.
McVey said, “MarketAxess intends to begin operations as a securities-based SEF, and as a SEF as soon as possible. We are fully preparing for the new regulatory landscape, even as these rules are still being finalised, as demonstrated by the recent CDS trades conducted over the MarketAxess platform with J.P. Morgan and six investor clients.
The SEC's period for public comment closed on 4 April and it will now decide on whether to adopt the proposal or modify it based on feedback received.