FM: What has been the impact of Dodd-Frank on the industry? What is your opinion on the rule-writing process regarding cleared over-the-counter trading (OTC)? Do you expect to be more involved? Will MF Global make it harder for smaller non-bank FCMs to get involved in cleared OTC trading? Should it?
NB: We have argued for a long time, that the goals of Title VII of Dodd-Frank are the right goals, but the mechanism to get there is flawed. Keep in mind that the commodities industry had its own financial crisis in 2001 following the collapse of Enron. In response, NYMEX, ICE and SGX all adopted voluntary clearing mechanisms at first for certain energy swaps and then for other commodity products too, and these mechanisms worked well.
Rather than build upon the success of these mechanisms, Congress and now the CFTC and SEC, have decided to construct an elaborate new complex framework for regulation. It is bad enough in the United States to have separate regulatory systems for securities and futures, but now there is an additional regulatory system for cleared swaps! Moreover, we are very fearful that the current system will increase systemic risk by aggregating previously dispersed credit risk among many swap dealers into a few clearing houses. Although we plan to be a significant player with our two shareholders in the cleared swaps space, we are afraid Title VII ultimately will reduce the number of clearing brokers and competition, generally in the FCM space.
I believe we would have seen a greater percentage of all swaps cleared sooner and more efficiently had the approach simply been to build upon the status quo and add some important new provisions such as mandatory registration of and capital requirements for all swap dealers, mandatory reporting of all OTC swaps, and differential capital requirements for cleared and uncleared swaps. Through economic incentives, the OTC industry could have been encouraged to clear more swaps, while gaining responsibility and transparency, all with far less confusion and cost and on a timelier schedule.
FM: There has been a lot of talk of placing restrictions on high-frequency traders (HFT). Is this necessary? What portion of your business comes from HFT? Is HFT a danger to markets? Is this a concern for your customers? Are any additional rules or restriction necessary?
NB: I don’t think there is anything wrong per se with high-frequency trading, though we do not support “naked” sponsored access arrangements. In fact, my guess is that within 10 years, today’s high-frequency trading will be considered relatively slow and quaint.
A significant number of our clients are involved in HFT, who all [say] that it has helped to increase liquidity, narrow spreads and lower execution costs for many market participants, including smaller retail participants. Also, under most circumstances, HFT firms have helped to decrease market volatility.
That being said, no trading should be permitted to artificially distort markets. There should be reasonable rules — such as adopted recently by the SEC in Reg Mar and ESMA — that restrict direct market access without any control.