First, I’d like to thank Commissioner O’Malia and his staff for inviting us here today for what is shaping up to be a very informative day.
I’m Kevin McPartland, Head of Rates and Credit Research at TABB Group. We are an independent research and advisory firm focused solely on the institutional capital markets.
Everyone finally agrees on something. Swap Execution Facilities are good for the market. Based on a soon-to-be-published TABB Group poll of more than 140 market participants, 87 percent believe the creation of swap execution facilities will ultimately be good for the swaps market. Of course everyone defines “good” differently, but nevertheless, this demonstrates how the market now sees that nearly every business model can – and most will – be adapted effectively to work under the proposed SEF rules.
That being said, no solution will satisfy all market participants — nor should it. Regulators should not try to appease everyone in the market but instead focus their efforts on creating a set of rules that work.
We must think back to the early days of financial reform to remember why these rules are being written in the first place -– to reduce systemic risk. According to the same TABB Group study, only 60 percent of the market believes the proposed rules will do so as written. The 40 percent who think otherwise are not simply naysayers in one corner of the swaps market either – they span the entire spectrum from swaps dealer to asset manager to SEF.
So while we debate whether RFQs must be sent to one trader or five and whether or not the proposed block trade size is too big or too small, we must remember to think big picture. Whether or not an RFQ goes to two dealers or five has no impact on whether or not another bank will fail. The rules should not be written to solve a political problem or appease a certain set of market participants – but instead to create a market structure that reduces systemic risk while increasing liquidity and encouraging competition and innovation.
I look forward to discussing these issues and others in more depth over the next few hours and hearing how the soon-to-be swap execution facilities will help us meet these goals.