By Roberta Rampton
WASHINGTON, March 8 (Reuters) - The U.S. futures regulator risks stifling liquidity in swaps market by requiring traders to ask for quotes from at least five market participants, major banks said in a regulatory comment period that ends on Tuesday.
To shine light on the opaque over-the-counter derivatives market, the Commodity Futures Trading Commission will require many swaps to trade on new 'swap execution facilities,' or SEFs, one of the most contentious parts of the Dodd-Frank financial reform law.
The CFTC has specified that 'block trades' won't have to move through SEFs. But the CFTC sets the bar too high for block trades, and few will qualify for the exemption, said Dexter Senft, a managing director at Morgan Stanley .
That means many large swaps would have to be executed on a SEF, broadcast to at least five other traders, and reported immediately after trading, forcing bid-ask spreads wider to account for the market risk -- or prompting some customers to avoid the trades altogether, Senft said.
'To the extent that a customer's intention to execute a large trade is 'signaled' to more than one market participant, the price of the relevant instrument will likely move adversely to the customer,' Senft said.
REGULATORS AT ODDS
Global regulators are divided about how to structure new platforms for trading derivatives, and whether to follow the lead set by the United States to require multiple participants on platforms.
Lawmakers have said they are worried differences in regulations may drive trade outside the United States.
Even within the country, the Securities and Exchange Commission, which has jurisdiction over SEFs for securities-based swaps, has proposed a model that would allow customers to decide how many participants could ask for quotes.
The CFTC should adopt a similar model, and get rid of the requirement that request for quotes (RFQs) go to at least five traders, said letters from Deutsche Bank, JPMorgan and the Managed Funds Association.
COMMODITY SWAPS AT RISK
The concerns are acute for thin markets, 'such as certain commodity swaps with a particular delivery location,' said the International Swaps and Derivatives Association and Securities Industry and Financial Markets Association in a joint letter.
Too much transparency would scare liquidity from the market, said the chief executive of an inter-dealer broker of credit default and securities-based swaps that plans to register as a SEF with both regulators.
'Our experience in the credit derivative market has shown us that participants will be much more likely to initiate, and respond to, RFQs if the nature of the request and the response to the request are not broadcast to the entire market,' said Nicholas Stephan of Phoenix Derivatives Group.
CFTC commissioners will need to vote to finalize the SEF rule. The deadline in Dodd-Frank is mid-July, but Chairman Gary Gensler has said the agency will fall behind on some rules.
The CFTC had proposed making its SEF regulations effective
90 days after they are finalized, but a self
regulatory organization said that was too soon.
The National Futures Association said it needs at least until Jan. 1, 2012 to prepare to oversee some parts of SEFs' compliance with the new regulation.
(Editing by Lisa Shumaker) Keywords: FINANCIAL REGULATION/SEFS (roberta.rampton@thomsonreuters.com; +202 898 8376; Reuters Messaging: roberta.rampton.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2011. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
WASHINGTON, March 8 (Reuters) - The U.S. futures regulator risks stifling liquidity in swaps market by requiring traders to ask for quotes from at least five market participants, major banks said in a regulatory comment period that ends on Tuesday.
To shine light on the opaque over-the-counter derivatives market, the Commodity Futures Trading Commission will require many swaps to trade on new 'swap execution facilities,' or SEFs, one of the most contentious parts of the Dodd-Frank financial reform law.
The CFTC has specified that 'block trades' won't have to move through SEFs. But the CFTC sets the bar too high for block trades, and few will qualify for the exemption, said Dexter Senft, a managing director at Morgan Stanley .
That means many large swaps would have to be executed on a SEF, broadcast to at least five other traders, and reported immediately after trading, forcing bid-ask spreads wider to account for the market risk -- or prompting some customers to avoid the trades altogether, Senft said.
'To the extent that a customer's intention to execute a large trade is 'signaled' to more than one market participant, the price of the relevant instrument will likely move adversely to the customer,' Senft said.
REGULATORS AT ODDS
Global regulators are divided about how to structure new platforms for trading derivatives, and whether to follow the lead set by the United States to require multiple participants on platforms.
Lawmakers have said they are worried differences in regulations may drive trade outside the United States.
Even within the country, the Securities and Exchange Commission, which has jurisdiction over SEFs for securities-based swaps, has proposed a model that would allow customers to decide how many participants could ask for quotes.
The CFTC should adopt a similar model, and get rid of the requirement that request for quotes (RFQs) go to at least five traders, said letters from Deutsche Bank, JPMorgan and the Managed Funds Association.
COMMODITY SWAPS AT RISK
The concerns are acute for thin markets, 'such as certain commodity swaps with a particular delivery location,' said the International Swaps and Derivatives Association and Securities Industry and Financial Markets Association in a joint letter.
Too much transparency would scare liquidity from the market, said the chief executive of an inter-dealer broker of credit default and securities-based swaps that plans to register as a SEF with both regulators.
'Our experience in the credit derivative market has shown us that participants will be much more likely to initiate, and respond to, RFQs if the nature of the request and the response to the request are not broadcast to the entire market,' said Nicholas Stephan of Phoenix Derivatives Group.
CFTC commissioners will need to vote to finalize the SEF rule. The deadline in Dodd-Frank is mid-July, but Chairman Gary Gensler has said the agency will fall behind on some rules.
The CFTC had proposed making its SEF regulations effective
90 days after they are finalized, but a self
regulatory organization said that was too soon.
The National Futures Association said it needs at least until Jan. 1, 2012 to prepare to oversee some parts of SEFs' compliance with the new regulation.
(Editing by Lisa Shumaker) Keywords: FINANCIAL REGULATION/SEFS (roberta.rampton@thomsonreuters.com; +202 898 8376; Reuters Messaging: roberta.rampton.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2011. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.