Icap, the UK interdealer broker, has launched the first swap execution facility authorized by US and UK regulators as the firm expects derivatives regulation in the two regions to harmonize.
Icap has launched IGDL, a SEF and multilateral trading facility, which it said is the first to be authorized by both the US Commodity Futures Trading Commission and the UK Financial Conduct Authority.
SEFs were introduced in the US as mandatory trading venues for certain types of swaps this year under the Dodd-Frank regulatory reform act. European regulators will also require certain derivatives to be centrally cleared and traded on an exchange under the Markets in Financial Instruments Directive, but have yet to specify the products that will fall under the new regulations.
Peter Best, chief operating officer of the Icap SEF, told Markets Media: “Whilst the US has moved faster than other regions in terms of regulation, the drivers behind the change in European regulations are very similar and we expect to be able to reconcile MiFID II with the SEF rules, as we have been able to do with MiFID I and MTF rules.”
Jim Rucker, global head of operations at MarketAxess, also told Markets Media that he expects regulators to eventually harmonize their derivatives regulations.
"We would be surprised if we end up with significant differences in international regulation but that is an open question right now,” Rucker added.
IGDL will initially focus on G3 rates products, including US dollars, Euros and and sterling interest rate swaps, overnight index swaps, forward rate agreements, swaptions, inflation and exotic swaps and options. All other products and instruments will continue to be serviced on Icap’s existing US SEF.
“IGDL has been launched to address cross-border liquidity issues, primarily for USD rates, due to the large amount of trading between US and non-US persons across the globe,” added Best.
Icap aims to add further products and jurisdictions.
“IGDL will be able to offer a single trans-Atlantic liquidity pool (incorporating North America, UK and the EU) and it is our ambition that, in time, we will be able to extend IGDL into Asia to create a truly global pool of liquidity,” said Best.
Rucker said MarketAxess has made changes to its European MTF for credit default swaps which were driven by regulation to differentiate between SEF and non-SEF trading.
MiFID II mandates a new type of trading platform, an organised trading facility, but Rucker expects the existing platform will meet the new requirements.
"Our expectation is that CDS trading under MiFID II would be covered under our MTF and we do not anticipate having to register a new entity,” Rucker added.
European regulators have authorized four central counterparties under the European Market Infrastructure Regulation, which requires certain products to be centrally cleared.
"Our experience in the US is that the clearing mandate did not make a big impact on electronic trading volumes,” Rucker said. “The real increase came with the Made Available to Trade requirement to trade electronically and we would expect the same in Europe."
Rucker said that in some respects the move to Dodd-Frank was easier than dealing with the changes in Europe as the focus in the US was only on derivatives. “The changes on MiFID II are more widespread as they also impact the cash markets,” he added.
Best said: “Impartial access requirements are forcing venues to compete at a different level and look beyond traditional competitors. This will probably change our business model and customer base over time, but even amidst so much regulatory imposed change we expect market structure to adapt through evolution, rather than revolution.
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