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The new rules regarding SEFs afford a large burden to companies needing to move away from traditional OTC trading, offering great opportunities for vendors in this industry to assist companies in bridging the move to exchange trading swaps.  But there was no shortage of delegates expressing concerns regarding some of the new rules surrounding swaps during this year’s FIA conference.

While there were a lack of headline making announcements during the week, one piece of news that had delegates talking was that of Bloomberg threatening legal action against the Commodity Futures Trading Commission over collateral requirements for Swaps.

Dodd Frank regulations, along with requiring swaps to be cleared and exchange traded, will also see Swap margins calculated by looking at the maximum risk over 5 days; compared to only 1 day for futures. Bloomberg, who are in the process of launching an exchange for executing OTC swaps, fear that the rule will give an unfair advantage to those facilitating swap futures as opposed to SEFs.

Disturbing Implications

Software providers at the conference were very keen to get the word out that they could cater to the new requirements of those dealing in swaps. Meanwhile, exchanges such as ICE and CME promoted their swap alternatives in the form of futures contracts.

Eugene Scalia, representing Bloomberg, states that the new rules strongly favour swap futures due to the higher margin requirements for swaps, and the discrepancy will harm SEFs which cannot provide futures. Scalia believes “the implications for SEFs (which cannot offer futures) are clear and profoundly disturbing”.

The CFTC have since made it clear that the rules regarding margin were finalised and they would not be revisited.

Other Concerns

Bloomberg were not the only ones with worries regarding the new rules during the week of the conference. A panel, formed of heads and directors of global trading companies, came together to discuss the future of swap execution. They were quick to express their concerns:

• “RFQ to five” will end up reducing liquidity as larger dealers will be reluctant to reveal their positions. Investors may not be comfortable displaying pre trade prices as this will expose business ideas. The panel agreed that ‘RFQ to one or more’ would be more appropriate.
• Participants should continue to have the freedom to choose how they trade, whether it be by voice or electronic means.
• One size fits all rules may not be right for a market with such diverse liquidity, volumes and frequency of trade.

The goals of Dodd Frank are clear; to reduce risk and increase transparency in swap markets. Proponents of the changes argue that the increased transparency and the ease at which Single Dealer Platforms can accommodate trade will bring more players to the table and end up increasing liquidity. Only time will tell. Part 4 will examine some of the other new laws discussed during the conference.

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