Nearly three years after the introduction of the Dodd-Frank Act (DFA), the CFTC has finally announced that this week (Thursday 16th May) it will vote on how OTC derivatives will trade under the new regulatory framework.
The DFA was designed to bring greater transparency and competition into the OTC derivatives markets, and some of the key rules that will be finalised are:
- Block Trade Rule: Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades (Swaps Block Rule)
- available to Trade Rule: Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade under Section 2(h)(8) of the Commodity Exchange Act (CEA); Swap Transaction Compliance and Implementation Schedule; Trade Execution Requirement Under Section 2(h) of the CEA
- SEF Core Rules: Core Principles and Other Requirements for Swap Execution Facilities (SEFs)
- Anti-disruptive Practices Authority – Interpretive Guidance and Policy Statement
Among the more contentious rules is the so-called RFQ5 rule, which would mandate users to request an RFQ from at least five dealers – it remains to be seen whether sense will prevail and leave it to the user to decide how many price requests they require. The FT commented that it may be reduced to two and then increased to three after a year. As always the Streewise Professor has his take on the RFQ5 rule. BloombergLaw also has good coverage of five important areas that need clarification.
Amongst those waiting for clarification of the final SEF rules are the banks that will be providing liquidity to SEFs (and aggregation of SEF Liquidity via their own single-dealer platforms) , the platform vendors and inter dealer brokers who hope to register as SEFs, the exchanges who hope to win business through the futurisation of swaps, and the CCPs who will clear the trades.
And lastly, clients. Are they really going to be better off as a result of the new regulations and SEF rules?
Well, I struggle to find a definition of better off, that would results in clients being the recipients of less competitive pricing, wider spreads, higher execution, clearing and margining costs and reduced access to liquidity in certain markets. Better off, I think not!