michaelMichael Schwenk, General Counsel and Chief Compliance Officer,

Risk: With SEF rules under scrutiny, what changes you expect to see in swap trading rules? Can the Bloomberg-Tradeweb domination in D-to-C Sef trading be challenged? If so, by who?

M.S: D2C SEFs and an RFQ driven market mean that, in many ways, swap trading for MAT products is not that different from the world pre-Dodd-Frank. In fact, buyside firms continue to deal on a daily basis with the same platforms that they were already using, although with the additional costs and regulatory burdens of SEF trading. High barriers to entry, compressed revenues and muted trading activity make it unlikely that many other players will enter the SEF space. In fact, the long expected consolidation appears to be in process.

Risk: Non-swap dealers such as hedge funds are getting into the swap market making business. How long with FCM's continue to clear trades for entities competing for OTC execution business? 2014 saw three FCMs leave the OTC clearing business - are you anticipating more retrenchment in the next 12 months?

M.S: While it is difficult to predict specific timing, one could easily see large buyside firms moving into self-clearing in OTC derivatives if clearing FCMs continue to exit or require 8-10 fold clearing fee increases. We are in the early stages of this development and much of the work to create practical solutions has not yet to be done.

Risk: The CFTC has promised action on post-trade anonymity in OTC markets - what other regulatory tweaks are needed to improve liquidity and competition in derivatives markets?

M.S: One of the biggest disagreements between the buyside and the swap dealers has been whether the new SEF-based market is intended to be "multiple to multiple" or "all to all." CFTC Commission Giancarlo in his recent whitepaper (which is generally very critical of the current SEF rules) has been at pains to make the point that the SEF rules do not require "all to all" and believes that swap dealers are essential for liquidity provision and dealers should have some prerogatives, analogous to traditional market makers. The debate plays out in the following concerns raised by the buyside, all of which are facets of the current two-tiered D2D/D2C SEF market:


  • Post-trade anonymity/name give-up
  • Enablement mechanisms
  • Break clauses
  • SEF rulebook review
  • Interplay between pre-trade credit checks (credit hubs and "ping/push" models) and the viability of "all-to-all" CLOB markets

Risk: In your opinion, have regulators achieved what they wanted in the 2009 G20 commitments? What would be on your wish list for regulators?

M.S: It is safe to say the hopes of the buyside in the wake of the GFC, that reforms could increase transparency in the swap markets, reduce costs and increase liquidity, have not been realized. Unfortunately, U.S. and EU regulators need to undertake a top to bottom review of what has and has not worked in the reforms and go back to the drawing board on a numbers of items. The regulators of other markets should proceed with caution before following.


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