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CFTC to Weaken RFQ Rules?

A CFTC commissioner has offered hope for those seeking to dilute the proposed rules on competitive quotes.

Confusion continues to reign in
financial markets over the likely
shape of SEF rules due to be 
announced by the US Commodity Futures
Trading Commission (CFTC) after reports
that the number of competitive request for
quotes required could be cut from the
proposed five, to just two.

The Financial Times says that CFTC
commissioner Mark Wetjen has sided with
the two Republican commissioners on the
CFTC board to reduce the number of
competitive quotes an executing institution
has to source for derivative transactions.

As rumours circulate almost on a
weekly basis that the final SEF rules will
be released, the report has shaken some
derivative trading technology providers by
citing Wetjen as arguing for just two
competing quotes and not the five that
were originally proposed. If the rules do
ultimately state that only two quotes are
required it will be seen as a victory for the
major banks over the growing band of
SEF operators.

One senior manager at a derivatives
trading platform says that the rule, if
implemented, would make it much harder
to argue the case for a SEF. “A trader can
very easily take two individual price
streams,” the manager says. “I makes it
easier for that trader to say ‘no’ to all but
two or three SEF operators.”

The manager further asserts that such a
rule would mean the established giants in 
the OTC derivatives trading space such
as Bloomberg and Tradeweb, would have
an advantage over the newcomers. “Two
competing quotes makes life so much
easier for executing brokers, they would
not need to consider taking a technically
more sophisticated solution – it would be
business as usual.”

Industry sources familiar with the issue
say that there is a growing understanding
within the CFTC that what are seen in
some quarters as overly strict SEF rules
need to be loosened. “[CFTC chairman]
Gary Gensler is starting to realise that no
matter how much he may wish it, other
nations are not going to fall into line on
the SEF rules, because the extra-
territoriality aspect just doesn’t work,”
says a senior market source involved in
the consultation process. “Asia in
particular is unlikely to support them due
to the complex nature of intra-region
relations. As an example, the SEF rules as
proposed would potentially give one
nation a degree of control over another’s.
That is not going to go down well in Asia,
and establishing lots of local SEFs is
equally unfeasible.”

The pressure on the CFTC to lighten the
rules increased with a survey that stresses
how wary the end user community is of
the proposed rules. SIFMA, the
International Swaps and Derivatives
Association (ISDA) and the Managed
Funds Association (MFA) have released a 
summary of results from a buy side
member survey which show that over
84% of respondents indicated that the
five request for quotes (RFQ) rule
proposed by the CFTC would result in
increased transaction costs.

Additionally, nearly 70% of
respondents indicated they would migrate
to other markets if required to post five
RFQs.

The survey was conducted in an effort
to provide further information to the
CFTC as it moves toward adoption of a
final Swap Execution Facility (SEF) rule.
The survey was sent only to buy-side
members of the associations; no dealers
participated.

“We continue to believe that only one
request for quote is sufficient, which is
how the SEC has constructed their rule,”
says Timothy Cameron, managing
director and head of SIFMA’s Asset
Management Group. “The CFTC’s
proposed rule is too restrictive of a 
requirement, which would remove
discretion from the asset managers – who
are in the best position to decide what
number of providers to go out to for any
particular trade – and impair liquidity in
these products. In the end, it would be
Main Street retail investors in funds and
pension plans that would be hurt by this
rule.”

Robert Pickel, CEO of ISDA, adds,
“Buy-side market participants are
concerned that the SEF rules might
increase costs and reduce the availability
of tools that they need to risk manage
their investment portfolios. This can
have adverse consequences to the
individual and institutional clients of
these firms.”

In the survey, 87% of respondents said
that transactional costs would increase,
76% anticipated additional costs in areas
such as legal arrangements, while 84%
said that asking for five quotes risked
exposing their investment strategy to the
market which could disadvantage their
own clients. A further 76% said the rules
would negatively impact liquidity and
68% said they would look to trade an
instrument that was not required to be
executed on a SEF.

“The survey results strongly argue for
the CFTC to amend their proposal and
permit the sophisticated investors that
participate in these markets to send a
quote request to as few as one recipient,
allowing those investors to rely on their
own, extensive expertise and experience
with these transactions,” says Stuart
Kaswell, general counsel, MFA. 

Paul Gogliormella

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