A lack of clarity on US OTC derivatives reform is negatively impacting the industry, particularly on how rules may differ to regulatory efforts in Europe, industry leaders warned at a conference.
Speaking at the FIX Protocol Limited conference in London on Thursday, Peter Best, business manager for interdealer broker ICAP, said the effects of divergent swaps rules in the US and Europe was already impacting the industry, foreshadowing long-term inefficiencies.
“We’re rushing to build platforms with generic functionality and it’s possible we will launch slightly different versions of similar core platforms in different regions, in order to adhere to different rule sets,” Best said. “Until we know what the final rules and recognition of foreign regulatory regimes look like, it’s incredible hard to know exactly what to deliver,” he said.
Speaking on a derivatives panel discussion, Best added regulators’ efforts to limit arbitrage opportunities by imposing strict rules on traditionally non-cleared instruments was “dangerous” for market participants, as resultant higher trading costs could limit growth.
Details of the rules governing swap execution facilities (SEFs) – a new venue category defined by the Dodd-Frank Act to trade OTC derivatives – were expected this month, but are likely to face delay as the Commodity and Futures Trading Commission tries to reach an agreement on certain aspects of the category.
The European version of SEFs – know as organised trading facilities (OTFs) – are also still being finalised in Brussels under MiFID II. Best suggested European regulators look to US rules to harmonise regimes on both sides of the Atlantic, so that the legislation is in tune with the global nature of the swaps market.
Fellow panelist Jaki Walsh, head of EMEA OTC product for US derivatives market CME Group, said many of her firm’s clients were choosing to send swaps trades through clearing houses ahead of the rules to avoid compliance issues.
“If firms can get clearing frameworks in place and understand the impact on liquidity, they are keen to start clearing. We’re getting a lot of early adoption interest in Europe and the US,” Walsh said.
Drivers behind early compliance include preparing IT systems, shoring up legal structures and forging agreements with third-party vendors ahead of the mandatory dates, Walsh said.
Around 50 market participants have said they will look to establish SEFs, including Best’s firm ICAP, which recently added US dollar interest rate swaps to its derivatives trading venue i-Swap USD.