Are the EU and US regulators converging, or diverging? Are definitions of SEFs (under Dodd-Frank) and OTFs (under MiFID) equivalent? And, do regulators get the differences between multilateral and bilateral execution?
Confused? Definitely.
Just looking at an interesting paper (published last week) from the European Capital Markets Institute (independent think tank). The paper argues that whilst the current MiFID framework captures multilateral OTC execution, it fails to provide a complete definition of bilateral execution mechanisms, and mainly focuses on own account trading (e.g. Systematic Internalisers).
The paper proposes that we consider own account trading, agency trades (‘discretionary matching’), and principal trading as pure bilateral execution services, and classified under a more broad definition of Systematic Internaliser.
Whilst definitions of Multilateral Trading Facilities (MTF) would be adapted to explicitly state that multilateral systems are not just those bringing together multiple interests from third parties, but those systems bringing together interests through ‘non-discretionary’ services.
Under this model, Single Dealer platforms would then fall under the broader catagory of Systematic Internaliser.
On SEFs and OTFs, the paper highlights four key areas of increasing divergence between US and EU, which are:
Ownership Limit:
US regulators propose 10% (CFTC) and 20% (SEC) ownership cap of SEF.
MiFID proposals do not put a cap on the ownership of the infrastructure.
Own Account Trading:
SEF definitions, own account trading is permitted.
EU rules, strictly prohibited under EU rules for OTFs.
Discretionary Matching:
SEF definitions would not allow discretionary matching. Voice intermediation will be allowed only if used as a mean of communication for the electronic matching. (CFTC 2011, p.1221) or for trading of block trades.
EU rules, discretionary matching would be the key feature of an OTF, which would partially capture hybrid systems based on voice brokerage services.
Minimum Quotes:
SEF definitions call for an obligation to have a minimum number of active participants that will be dealing with a request for quote or other buying/selling interest.
OTF category will leave full discretion to the operator/broker, under its mandate and under a looser definition of best execution, the decision to survey the whole or a tiny part of the market to get an interest that would provide the ‘best’ available deal for the client.
Paper available here
Filed under: CCP, CFTC, Dodd Frank, Internalisation, OTC, OTF, Paul Blank, Regulation, SEF, SWAPS |
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