Wall Street wins rollback in Dodd-Frank swap-trading rules

New Platform

The rules represent the final definition of a new type of trading platform set up under Dodd-Frank that is intended to serve as an alternative to exchanges operated by CME Group Inc. and Atlanta-based IntercontinentalExchange Inc. Bloomberg LP, the parent company of Bloomberg News, has filed a lawsuit challenging a separate CFTC rule that the company said will harm its planned swap-execution facility. Tradeweb LLC, Icap Plc and GFI Group Inc. have said they plan to set up so-called SEFs.

Dodd-Frank would have most swaps traded on SEFs or exchanges that let buyers and sellers interact with multiple participants. About 80% of interest-rate swaps will be guaranteed at clearinghouses and traded on SEFs, Credit Suisse AG analysts Ira Jersey and Michael Chang estimated in a May 2 note.

“The ground has been plowed and turned. Now it’s up to market participants to see what we can grow here,” Shawn Dorsch, president of Charlotte-based Clear Markets Inc., an electronic swap-trading company.

Five-Quote Proposal

CFTC commissioners changed the proposed quote requirement after talks faltered late last year over the plan to mandate five quotes. JPMorgan, Deutsche Bank AG and other swap dealers lobbied against the five-quote requirement, telling regulators that it is unnecessary, will increase trading costs and reduce liquidity on facilities using request-for-quote systems.

Buyers of derivatives represent by the Securities Industry and Financial Markets Association, International Swaps and Derivatives Association Inc. and Managed Funds Association told regulators they wanted a one-quote requirement and would consider using other markets if the five quote requirement was put into place.

The final rules let buyers request at least two quotes initially and then three quotes after a phase-in process, according to a CFTC official who briefed reporters yesterday. Gensler agreed to the quote compromise after failing to persuade Republican and Democratic commissioners that five were needed. The three-quote requirement would begin in around October 2014.

Dealers ‘Win’

“It is going to be perceived as a win for the dealers, especially the two included in the RFQ,” Sunil Hirani, chief executive officer of the trueEX Group LLC swap-trading platform, said in a telephone interview yesterday. “I see it as a capitulation for those who wanted a higher number.”

Mark Wetjen, one of three Democratic commissioners, said the rule provides flexible trading protocols that represent a “fundamental shift” away from market practice. “‘Flexible trading protocols’ is not code for ’status quo’ as some might suggest. It is not code for ’pro-dealer’ trading protocols,” Wetjen said.

In addition to the RFQ measures, the rule requires trading platforms to have an order book available to all market participants. Those bids and offers would be communicated to the rest of the market.

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