The chief derivatives regulator on Thursday proposed making trading in the most popular swaps as transparent as stock exchanges, while trying to ensure that requirements for less popular swaps do not end up killing them.
Dozens of firms, such as IntercontinentalExchange Inc, hope to qualify as swap trading venues as the opaque swaps market is forced onto the public stage as part of a Wall Street financial overhaul mandated by the U.S. Congress.
How market regulators define these swap execution facilities, or SEFs, will determine who will be allowed to compete in what is expected to be the lucrative business of trading and brokering the swap contracts.
A week ago, Commodity Futures Trading Commission Chairman Gary Gensler delayed the long-awaited plan due in part to Republican and industry concerns that the rule was not flexible enough.
The new plan fixes most of those concerns, several swaps trading outfits said on Thursday.
The CFTC voted 4-1 to issue a proposal allowing swap execution facilities to use various trading systems, as long as certain requirements are met.
The proposal would allow SEFs to have electronic trading systems similar to stock market order books, where bids and offers are continuously updated. But it would not require them to do so, a possibility that some had feared would knock the wind out of trading in some of the less popular contracts.
We applaud the CFTC for proposing these definitions for the trading of derivatives, and believe that they will increase transparency and create more efficient markets for end-users, Tradeweb CEO Lee Olesky said. Tradeweb, which offers electronic buying and selling of swaps, is owned by Thomson Reuters.
Swap venues also could have a request for quote system, as long as the request for a quote to buy or sell a swap was sent to at least five market players in the trading system.
Republican Commissioner Jill Sommers, who called the original proposal too narrow in scope, balked at the requirement that SEFs give market participants the option to post both firm and so-called indicative quotes, where the trader indicates what price he would be willing to trade without committing to the transaction.
Both types of quotes would have to be viewed by multiple parties.
Sommers said the dual requirement may limit competition.
In my view this provision is not mandated by Dodd-Frank and may limit competition by shutting out applicants who wish to offer (request for quote) systems without this type of functionality, said Sommers, who voted against the proposal.
Fellow Republican Commissioner Scott O'Malia questioned whether the plan would serve all markets in a manner that is transparent.
Allowing market participants to post indicative quotes is designed to ensure that less liquid derivatives are not forced into a fully transparent environment that traders say would deter participants from posting true bids and offers.
Under the Dodd-Frank overhaul, the CFTC has been given the power to police most of the estimated $600 trillion over-the-counter derivatives market.
The U.S. Securities and Exchange Commission is in charge of security-based swaps, which are at most about a 10th of the market. The SEC is expected to offer a similar plan in the new year.
The original CFTC proposal offered three tiers of transactions: larger trades that meet a specific level of volume, smaller trades that are not block trades but do not have major volume, and other transactions such as block trades where an SEF could provide end-users the chance to trade even though it is not required.
Companies that traditionally have been big players in the over-the-counter swaps market are working to ensure they stay in the game as the business moves under the CFTC's regulatory oversight. Barclays, Credit Suisse, Morgan Stanley and others have met with the agency to discuss the new trading platforms.
The CFTC proposal is open for a 60-day comment period.
(Additional reporting by Christopher Doering, Jonathan Spicer and Ayesha Rascoe; Editing by Robert MacMillan, Jim Marshall and Dale Hudson)