“Nothing in the statute mandates these minimum trade functionalities. We made them up,” Jill Sommers, one of two Republican CFTC members, said at the meeting. “I believe we will regret this restrictive approach because it may cause the U.S. to lose this business to foreign jurisdictions that do not stifle illiquid contracts in this way.”
The final rule would also allow companies that execute trades through the telephone or any form of technology to operate as SEFs, according to a CFTC official. Brokers such as GFI and Icap, which facilitate trades between banks, lobbied the agency to permit trades conducted by voice and not require electronic-only methods.
“These are short-term gains for the status quo,” James Cawley, CEO of Javelin Capital Markets LLC, said in a telephone interview yesterday. “The market is moving to cheaper and more electronic trading of swaps. The argument that the products are bespoke and too complicated to be traded on a screen are unfounded.”
A separate rule approved on a 3-2 vote today sets the threshold for when trades are large enough to be traded off the platforms in transactions known as blocks. The rules for blocks also allow for a phase-in process. rules for blocks also allow for a phase-in process.
Under the rule, a trade would be considered a block if it is larger than the 50th percentile for notional value in a given category of swaps. Starting in April, the threshold would rise to the 67th percentile. About 14% of interest-rate and credit swaps might be traded as blocks until the higher threshold takes effect, a CFTC official said.
The CFTC rejected two amendments offered by Scott O’Malia, a Republican commissioner, to require the CFTC to conduct further study of swap data to determine block thresholds. The final rules impose an “arbitrary and automatic increase” in the threshold based on limited data, he said.
The CFTC voted 3-2 on a separate rule governing how SEFs and exchanges determine which swaps are made available for trading. The CFTC’s ability to review the determinations is limited under the rule, according to Sommers.
The rule will “bind the entire marketplace to a trade execution requirement as long as the swap must be cleared, even if liquidity is lacking,” she said. “This is overly broad, potentially inconsistent with foreign regulations, and just plain bad policy.”
The commissioners are also scheduled to vote today on interpretive guidance and policies on disruptive trading practices.
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