The derivatives industry is pushing back against a proposal by the Commodity Futures Trading Commission that would require all participants on a swap execution facility or a derivatives exchange to record all pre-execution trade information.
The requirement serves as a large surtax on exchange transactions and causes end users to take transactions away from SEFs or designated contract markets, according to an April 17 comment letter submitted by IntercontinentalExchange (ICE).
Sifma’s Asset Management Group, in an April 17 comment letter, application of the rule to asset managers raises substantial cost and compliance issues. Costs include not only set-up costs for recording and storage of oral conversations but also on-going procedures to insure that written records are searchable and identifiable and comply with record preservation requirements.
“We are also concerned that imposition of both oral and written recordkeeping requirements on participants in the SEF market could have a significant chilling effect on the willingness of Asset Managers and end-users to trade swaps directly on SEFs,” said the Sifma AMG letter. “As a result, application of the Rules would arguably undermine the statutory goals of promoting SEF trading and pre-trade price transparency in the swaps market.”
Evidence is emerging that swaps market participants are choosing to avoid SEFs and the U.S. in general.
For example, recent regulatory rulings have resulted in a shift in trading in euro- and U.S. dollar-denominated interest rate swaps. The CFTC, through its MAT (made-available-to-trade) determinations and its recent tightening up of rules regarding European MTFs (multilateral trading facilities), is causing overseas swap market participants to think twice about SEFs.
The CFTC has clarified the conditions that EU-regulated multilateral trading facilities (MTFs), must fulfill in order be granted relief from SEF requirements for transactions involving U.S. persons. An MTF must report all swap transactions to a Commission-registered or provisionally-registered swap data repository as if it were a SEF, in compliance with parts 43 and 45 of the Commission’s Regulations. Qualifying MTFs must also submit monthly reports to CFTC staff summarizing levels of participation and volume by U.S. persons.
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