Wall Street (which includes yours truly) was in Washington on Wednesday (Aug 15) to discuss Swap Execution Facilities with the Securities and Exchange Commission and the Commodity Futures Trading Commission.
I wasn’t the only one walking the block between Union Station, where the express train from New York arrives, to the SEC’s building. Walking in, my first thought was how can regulators complain about Goldman’s new building when theirs was just as new and (nearly) as shiny?
Esthetics aside, two panels focused on defining what a swap execution facility should be. The SEC sat on the left side of the U-shaped table and the CFTC on the right, with the panelists in the middle. The expected firms were present – independent platforms (MarketAxess, Tradeweb, Bloomberg), interdealer brokers (the Wholesale Markets Brokers Association, represented by Tradition), the futures exchanges (Chicago Mercantile Exchange and IntercontinentalExchange) and end users (PIMCO, et. al.).
There were some surprises. The Chicago Board Options Exchange was there. It took me a few minutes to figure out why, but their FLEX platform for trading bespoke equity options contracts could easily become an SEF. NASDAQ participated as well. Their motives are less clear. The only obvious link is their partial ownership of fledgling interest rate swap clearing house IDCG.
SEC Chairman Mary Shapiro sat in the front row as did CFTC Chairman Gary Gensler. Neither asked questions of the panelists directly, although Mr. Gensler couldn’t help but whisper into the ears of his staffers during the proceedings. The audience was a mix of dealers, IDBs, press and a high frequency trading firm or two. The SEC could have made things much more interesting by issuing visitor badges listing company names in addition to panelists’ names.
I learned a few things, though the arguments for and against each open issue were mostly restatements of ideas already aired. I will dig into these and other open issues in an upcoming research report, so stay tuned. The questions from the regulators – dominated by the CFTC – were thoughtful and focused in the right places; a stark difference from the early days of Congressional meetings in which one was often left wondering how well members of the legislature understood what a swap was.
Just over 300 days remain until these rules must be in place per Dodd-Frank. It is now abundantly clear that the OTC derivative execution landscape is going to change. Exactly what it will look like is still a good topic for debate (and a topic I will discuss in forthcoming research) but in this analyst’s opinion, we’re moving in the right direction.