By Matthew Hodgson, Mosaic Smart Data
Originally published on TABB Forum
Regulation is rapidly increasing transparency across financial markets, enhancing audit requirements and ensuring effective market surveillance. However, the mounting cost of compliance continues to squeeze sell-side banks, which have been facing declining FICC revenues and higher capital costs. With the introduction of MiFID II set for January 2017, technology – and particularly data analytics – could hold the key to developing competitive advantage in this new regulatory reality.
Since the financial crisis in 2008, regulation has played a key role in transforming the structure of capital markets and the manner of counterparty interaction. The requirements imposed have enabled regulatory bodies, such as the FCA, FINRA and SEC, to introduce more effective monitoring and superior levels of transparency across foreign exchange (FX), fixed income, equities and commodity markets.
Driven by regulatory change, trading activity has migrated away from opaque voice based markets toward a model based on transparency and risk mitigation on electronic venues, with market participants increasingly required to report and clear trades through CCPs.
The playing field for sell-side sales and trading teams is shifting permanently from relationship-driven to electronic message-based banking.
While the structural benefits of reform to the financial ecosystem are wholly apparent, however, the cost of compliance for individual firms has increased significantly, with sell-side banks bearing the lion’s share of the burden. As a result, the ability of these institutions to hold trading inventory and operate as liquidity providers has been increasingly constrained by regulatory capital requirements and mounting pressures on fixed costs.
According to the Economist, FICC revenues have fallen by 48% among the world’s largest banks over the four-year period between 2009 and 2013, and the downward trajectory is expected to continue. This has much to do with the desire from the Central Bank community to keep long-term interest rates low through quantitative easing, thus depressing trading activity, but also the weight of regulation. Current industry research indicates that these sell-side institutions will continue to experience fixed income balance sheet declines of between 10%-15% over the next 2 years and as much as 15%-25% out of flow rates.
Facing the Challenge
- Banks’ FICC revenues have already declined by 48%
- Cost-to-income ratio (CIR) remains above 70%
- Fixed income balance sheets set to decline by further 10%-15%
These challenges have arisen as a result of two prominent factors:
- A sharp rise in regulatory oversight, with banks now having to post increased regulatory capital to cover potential losses; and
- Tighter spreads associated with electronic trading having a detrimental impact on revenue. While this provides enormous benefits for the wider market, this decline in margins has resulted in banks having to turn over their balance sheets at a faster rate, as the cost of warehousing risk has becomes increasingly prohibitive.
Adding to the current concerns, the implementation of MiFID II will further reshape the regulatory landscape, posing new challenges for banks, specifically by changing the way in which bonds, derivatives and ETFs are traded on electronic platforms. While full details are yet to be finalized, proof of best execution is a regulatory certainty, and the new rules will force players to adjust their market models toward a hybrid-agency model. This will be especially relevant for banks that cannot afford the capital costs of maintaining inventory. Clearly, many of the lessons learned from the equity markets will now be applicable to the FICC markets, with specific emphasis on being able to measure execution performance in both a principal and agency environment.
Marching Out of Step
Despite the growth, adoption rates in electronic trading, a key component of financial technology, remains inconsistent, with significant discrepancies between FX, equities and fixed income, as well as across geographical lines. The fixed income market, for example, has transitioned at a slower pace by comparison, with 57% of volume executed electronically in Europe and only 12% in the US in 2014, according to Greenwich Associates. However, sell-side fixed income volume executed electronically continues to increase, as data from Celent demonstrates:
Observing the US IRS market, which has been directly impacted by Dodd-Frank, in the chart below, it is apparent that the migration to electronic venues can be relatively immediate. In the dealer-to-client market, SEF (electronic) market share rose from ~10% in January 2014 to the current ~60% (March 2015), with further electonification anticipated. The implication for European markets with the upcoming MiFID II implementation in January 2017 is apparent.
Old Heads. Young Minds
Although a cliché, every cloud has a silver lining, and this could well be the case for FICC markets. The financial crisis and subsequent regulation proved to be extremely important in ushering in the current wave of creativity and fintech innovation, causing banks and other financial institutions to rethink their strategies. Many are coming to the realization that they need to partner with emerging innovators. As such, finance and technology has become synonymous, and data analytics, in particular, is moving to the forefront of efforts to provide new solutions to ongoing market challenges, such as trade reporting, risk management and audit requirements. Moreover, a profound and atomic understanding of client activity and behavior will define winners and losers in the coming years.
With technology front and center in today’s financial marketplace, the debate remains as to how to effectively identify and deploy new technology, leading to the perennial question of: Should we build in-house or purchase from a specialist vendor?
Building in-house solutions has its benefits, but it takes significant time and resources. With budgets and margins under real pressure, many firms are unable to meet this challenge by deploying internal teams to address the overwhelming tidal wave of change. By opting for the latter, banks have been able to cut their time to market by years, quickly and efficiently adhering to new market rules and meeting best practice legislation.
Another significant advantage for banks in outsourcing technology to third-party providers is to keep pace and engage with the rapidly evolving fintech landscape. As a result, they are now looking to technology vendors to bridge the gap and ensure sales and trading teams have access to the best and most competitive tools.
By tapping into fintech clusters such as London and New York, banks are capitalizing on the highly focused and outcome-based delivery of these companies. As a consequence, it is not surprising that global investment in financial technology ventures has more than tripled, from less than US$930 million in 2008, to more than US$2.97 billion in 2013.
Smart Data Is the New Currency
Within the fintech sector, the field of data analytics has quickly become the new opportunity in financial markets. This comes at a time when banks are beginning to recognize the competitive advantage that can be gained from partnering with specialist technology vendors.
However, challenges persist. While electronic trading has generated a torrent of transaction data, the industry currently lacks the necessary processing tools for effective aggregation, standardization and analysis. This has become crucially important to sell-side firms at a time when strategy differentiation by market, client type or geographical region is becoming common practice as a means to achieve unique competitive advantage.
Furthermore, market fragmentation, as a result of the proliferation of electronic venues, has effectively fractured liquidity and trading volumes in some markets, rendering the standardization of trade data more challenging.
Only by gaining control of an abundance of available data and deriving actionable intelligence will banks be able to focus on identifying new opportunities and generate the highest returns in the markets they choose to compete in and be able to navigate the new regulations and operational challenges ahead.
The pace of change in the field of data analytics is rapid. As technology vendors continue to work toward providing easy-to-use tools that can be quickly integrated into existing systems, it is the ability to harness predictive analytics based on historical patterns that remains at the cutting edge. For a FICC-trading bank, this could provide answers to questions such as: Which clients am I anticipating seeing in the market today? Or, What products do I think clients will likely be trading?
The business advantages that can be harnessed by predictive analytics are significant and will act as a differentiating factor in performance. In a recent Harvard Business School article, leading academic and analytics guru Thomas Davenport argued that we are now entering the era of Analytics 3.0, where its predecessors were Business Intelligence (1.0) and Big Data (2.0). Gartner has been predicted that by 2017, firms with predictive analytics in place will be 20% more profitable than those without.
As the FICC trading ecosystem continues to evolve, sell-side institutions must focus on how to apply technology at the intersection of trading, regulatory compliance and operational efficiency to maintain and grow market share within a profitable client universe. The entrepreneurship and financial creativity of yesteryear, which is being restricted by regulatory codes of conduct led by global government agencies, can only be replaced by the granularity of understanding that intelligent data analytics delivers.
In what has become a challenging environment for all, the real question is how quickly the industry can adapt.
By George Bollenbacher, Capital Markets Advisors
Originally published on TABB Forum
Much has been written about the impact of regulation on the fixed income and derivatives markets, but market forces also are transforming the space. How are the fixed income and derivatives markets evolving, what is driving the changes, and how can the buy side cope?
Ever since the passage of the Dodd-Frank Act and EMIR, and with the looming implementation of MiFIR/MiFID, there has been a lot of press coverage of the impact various regulations have had on the performance and adequacy of markets, particularly the fixed income and derivatives markets. To mention a few recent items: an op-ed by Michael S. Piwowar and J. Christopher Giancarlo, of the SEC and CFTC, respectively, entitled “Banking Regulators Heighten Financial Market Risk”; an opinion pieceby BlackRock, entitled “Addressing Market Liquidity”; and a joint regulatory report on the Treasury market spike of Oct. 15, 2014. With all these voices, and others, raised about the state of the markets, perhaps we need to take a clear, and hopefully unbiased, look at how the fixed income and derivatives markets are evolving, what the causes are, and how the buy side, in particular, can cope.
In order to get the picture, let’s separate the influences into regulatory and market, the latter referring to the market for services as opposed to the financial markets.
The first thing we need to look at is specific regulatory changes and their impacts, starting with the lowest impacts and working our way up.
Reporting – Here, aside from the obvious discontinuity between the US and Europe, the bulk of the effort will be borne by the dealers. European buy-siders do need to make sure someone is reporting for them, and, since they remain responsible for the reporting quality, that the reports are accurate. The accuracy requirement may be the bigger of the two, since the quality of reporting has been very bad worldwide, and the EU regulators are making noises about cracking down on bad reporting. European buy-siders who delegate their reporting to their trading counterparties may need to winnow down their trading stable to those firms that can be trusted to report for them properly.
Trading Venues – In this area we face acronym overload, with SEFs, DCMs, MTFs, OTFs, and SIs. The US has had the first experience with mandatory exchange trading of OTC derivatives (is that term now an oxymoron?), so it’s worth looking at the US experience. The first thing we see is that exchange trading is anything but mandatory, even where it’s mandatory. SEF trading as a percentage of overall MAT trading is about 50%, largely because it is laughably easy to trade non-MAT versions of MAT swaps, as well as using the exclusions for block and end-user trades. The second observation of note is the bifurcation of the SEF markets into dealer-to-customer (D2C) and dealer-to-dealer (D2D) specialties, in much the same way the old OTC market worked. Plus ca change? In all, the much-heralded era of exchange trading of swaps is a long way from reality.
Clearing – In many ways, this regulatory change has the biggest direct impact on the buy side. One major result is the concentration of risk. Where a large buy-sider could spread its risk across many counterparties, it now must accept one or two CCPs as counterparties. Everyone, at this point, is aware of the worldwide concerns with the potential failure of a CCP. There is, however, a second, perhaps more unsettling, impact of required clearing: opacity. Most buy-siders interact with a CCP through a FCM, which means that CCPs have no idea who their ultimate credit risk is. Since both CCPs and FCMs are in a competitive business, and since one way to compete is on risk, the ultimate impact of mandatory clearing on the market may be that everyone is carrying a loaded pistol in a dark room.
Capital and Liquidity – Finally, the capital and liquidity requirements being implemented under Basel III have rewritten the rules for almost every aspect of the capital markets. The rapid comprehension within banks of the meaning of “denominator creep” has already prompted them to scale back many of their capital markets services, from trading to clearing. Although much of the public’s attention has been focused on Dodd-Frank, the deepest and longest-lasting regulatory impact will probably be from Basel III.
While the regulatory forces above have been gestating, another set of influences has been at work – changes in the markets themselves. Let’s look at those now.
Costs and Spreads – Long before the great recession and any resulting legislation, the natural forces of increased competition and efficiency were at work. These two inevitable trends are universal, impacting every market, even those as disparate as energy and mobile technology. In the capital markets, the trends are evidenced by the use of technology across every part of the trading cycle, and by the pricing pressures that competition brings. In other words, automated trading, narrow spreads, fragmented markets, and some reductions in the liquidity of non-standard products.
Low Volatility and Trading Volume – This phenomenon is not a natural force, but a result of the seemingly unending quantitative easing of the various central banks as a result of the great recession. As these central banks inject money through the mechanism of purchasing bonds, they artificially drain the markets of tradable securities and keep price volatility artificially low. This artificial situation may have masked a serious problem, namely …
Attrition of Market-Making – Both of the previous forces have the entirely predictable impact of reducing the incentives to make markets, so it shouldn’t surprise us that the bond and derivatives markets are moving inexorably away from a principal to an agency structure. This is not a complete change, of course, and increased volatilities and volumes may return principal trading to its former levels; but that process won’t be simple or painless. Buy-siders will have to go through some unpleasant market experiences before the trading banks come back in force, if they ever do.
Evolution at Work
So where are all these forces taking us, especially from the buy-side view?
Total Cost of Ownership – Everyone is becoming aware that trading decisions are being heavily influenced by a series of things that happen after the trade is done. If I have to clear this trade, which is the most efficient CCP? Will the choice of CCP affect my price? Whom can I trust to report for me? When I want to get out of this position, will there be enough market liquidity to accommodate me? Which clearing agent will be the best choice over the long run?
Embracing the Agency Model – Years ago the equity markets were entirely agency, and the fixed income markets were entirely principal. Now the world, while not exactly turned on its head, looks decidedly different. Fixed income buy-siders are having to understand how a bond or swap trade gets done on an agency basis, whether one must become a member of a venue or use a broker in order to trade, and who bears the cost of a trade that can’t be cleared. As clearing agents fall by the wayside, trading agents rise out of the mist.
Manufacturing Liquidity – As Basel III forces banks to re-examine their market-making commitment, other firms, such as the principal trading firms (PTFs) identified in the joint regulatory report, have stepped to the fore. In fact, the report indicates that, during the Oct. 15, 2014, Treasury spike, the PTFs stayed in the market while the primary dealers stepped back, if only momentarily. We will probably see liquidity come from other sources than the dealer banks, including possibly unguaranteed affiliates, as we have been seeing in the swaps market. To be sure, manufacturing anything has its costs, and we should expect to see the costs of trading rise somewhat as the need for liquidity intensifies.
Closing Out Positions – In the swaps market particularly, the cost of maintaining back-to-back positions has been recognized as prohibitive. Dealers have already begun their efforts to close out positions as soon as they lay them off, and we should expect this practice to accelerate. This will have two main impacts:
- Because standardized contracts are much easier to compress, we should see a pronounced price advantage to buy-siders for using them. For those who have non-standard hedging needs, this will introduce basis risk; but that is something that the futures market has dealt with for decades, so the buy side should be able to manage it.
- As dealers exit swaps positions ASAP after executing the customer’s order, this will leave CCPs with a portfolio of positions with only the buy side and non-traditional players. Whether anybody in that business knows how to deal with that kind of swaps market, which, after all, has been the futures model for years, remains to be seen.
Evolution has always been a messy business, of course. Some species become extinct, others unexpectedly rise to dominance, and the whole process has been called survival of the fittest. I guess there’s no reason why the financial markets should be any different.
By George Bollenbacher, Capital Markets Advisors
Originally published on TABB Forum
The prognosis for financial regulation in the US appears very poor at the moment. Here are four important questions about structural reform that need to be answered to get regulation back on track. Otherwise, we may just have to wait for the next financial disaster to prompt lasting change.
The recent series of papers on reforming the financial regulatory structure published by the Volcker Alliance makes interesting reading. You may or may not agree with the conclusions; but I, for one, can’t help but think that there are some important questions about structural reform lurking just under the surface that either were not asked or were subsumed in these papers. So let’s get them out on the table and see where they lead us.
No. 1: Should a central bank be the primary banking regulator?
The Volcker Alliance documents recommend that the primary banking regulator should be the Fed. But we need to look closely at the functions of a central bank, and a banking regulator, to see if that combination really works.
To begin with, a central bank must be, by definition, a bank. That sounds obvious, but it has one or two subtle implications. The first is that, in the modern world, 99.99% of money is actually a bank’s promise to pay. And every commercial bank’s promises to pay are offset by the central bank’s promise to pay. So all of these institutions are tied together in a web. Whether the entanglements of that web make it harder for a central bank to act as a truly independent banking regulator is open to debate, but we probably need a healthy public discussion of that topic, for a start.
Then we have to recognize that most central banks are also lenders of last resort – generally to the banks in their system. Here, it is important to understand that the last resort function only happens in a crisis, but the potential is there all the time. If the regulator is doing its job well, the last resort function usually remains just a concept; but events that aren’t within the purview of the regulator, such as the actions of another country’s regulator, can bring on a crisis in a hurry. If that happens, is it better to have the banking regulator separate from the lender of last resort? Another topic for discussion.
Finally, central banks have a set of functions that require them to be active in the markets, such as controlling interest rates and currency values. These functions especially require them to deal as principal (and sometimes as agent) in these markets, often trading with the banks in their system. Thus, we could easily see instances where the central bank as monetary authority is dealing with a bank in one way, and the banking regulator is dealing with the same bank in another way. Whether the needs of the central bank as market operator might trump the needs of the central bank as regulator is another subject for discussion.
There are countries, of course, where the only regulator of the banking system is the central bank, but those countries may not have the same political or economic framework the US has. In any event, if we are going to restructure financial regulation in the US, we need to answer this question first.
No. 2: How should we define market regulation and depository regulation?
A variation of this question has often been discussed, in the form of combining the two market regulators in the US. Since we’re the only country with separate regulators for securities and commodities, the Volcker Alliance recommendations are to combine the SEC and CFTC, to nobody’s surprise. Have one banking regulator, and one market regulator, so the logic goes.
But there is another, perhaps more relevant question: Should we instead place the depository functions of both banks and brokers under depository regulation, and the market functions of those same institutions under a market regulator? Should we have one regulator charged with protecting, in effect, both checking and trading deposits, and another regulator requiring all market participants, large and small, including clearinghouses, to act professionally and prudently?
The idea that one depository regulator would oversee both a bank and a brokerage firm may sound strange, but it is more palatable if we define regulation along functional as opposed to organizational lines. The recent experience with such requirements as Volcker Rule examinations has shown us that the expertise necessary for depository regulation doesn’t usually translate well into regulation of principal trading functions, and vice versa. To the extent that deposits are insured, as they are in both banking and brokerage, the regulation of deposit takers is essentially the same across both industries. And the surveillance of market participants, whether they are trading for their own account or for others, is homogeneous enough to be handled by one regulator across all market participants.
There are, of course, lots of discussion points here. This would require two regulators for all entities that both take deposits and trade in markets, but most financial institutions have more than one regulator anyway. This structure would preclude what we currently see in Volcker Rule exams, the folly of having five sets of examiners, the Fed, the OCC, the FDIC, the SEC, and the CFTC, all trying to come up to speed on what is essentially the same subject. If asked, most financial institutions would probably prefer to have one regulator knowledgeable in their depository functions and one knowledgeable in their market functions, as opposed to several regulators trying to handle both functions.
No. 3: How important is international symmetry in regulation?
There has been discussion about international asymmetry in financial regulation for as long as I can remember, perhaps as far back as Walter Bagehot (you can look him up). Even then, the crux of the matter was regulatory arbitrage. Long ago, it was about moving physical money and assets into venues where regulation was more lax or out of date. Today it’s about moving transactions or funds electronically between venues for the same purpose.
As it turns out, there are other reasons to move transactions between venues, such as tax and counterparty location, so every intra-company, cross-border trade isn’t a regulatory arbitrage. On the other hand, cases like AIGFP, where trades done in London by a French-chartered company resulted in a $150+ billion Fed bailout of a US insurance company, show that regulatory arbitrage can have some very significant impacts, in particular the kind of “blow-back” danger we saw in AIGFP. In the ongoing regulatory conversations about the implementation of the Pittsburgh G-20 agreement, there have been some sharp words exchanged about regulatory practices that led to blow-backs.
Thus, it is a good idea to prioritize the regulatory asymmetries that would promote the kind of arbitrage that could result in blow-back, while placing less importance on asymmetries that would keep the problems contained in the venue where they began. The area of most interest today is the recognition and regulation of derivative clearinghouses. Since the implementation of the G-20 agreement is generally recognized to have greatly concentrated the risk in the derivatives market, perhaps the most important international symmetry concerns CCPs. The main Volcker report only mentions clearinghouses once, in passing, and the national case studies not at all. Given the amount of attention being paid to the international regulation of CCPs, that’s an important omission that makes the report look a bit out of date.
No. 4: Finally, is this all just a waste of time?
The Volcker Alliance report laments – and everyone is probably aware of – the many unsuccessful attempts to streamline financial regulation in the US. If most impartial observers recognize that US financial regulation is decidedly sub-optimal, and that the structure is at least partly to blame, we need a clear understanding of why that structure persists.
Perhaps we can start the explanation with this quote from the report, which is itself a quote from the Financial Times: “Former Senator Chris Dodd echoed that sentiment in a speech last year. ‘I would’ve established a single prudential regulator and gotten rid of the rest,’ he said. But, he added, ‘I got about three votes at the time.’” That leads to the immediate question of why such an obvious improvement would be so unpopular in the halls of Congress.
That may sound like a naïve question, but it’s really not. If the members of Congress have enough intelligence to understand the benefits of such a change, then the only explanation I can see is that the financial industry has so much influence over Congress that it can stop this kind of reform in its tracks. Assuming that this isn’t a case of blackmail, then it can only be a case of money, perhaps suitcases of money.
If that logic is correct, and I’m anxious for it to be proven wrong, then the prognosis for financial regulation in the US is very poor. If financial institutions can – pardon the expression – bank on a fragmented regulatory structure to give them the freedom they want, then we just have to wait patiently for the next financial disaster. In that case, the Volcker Alliance documents might make interesting history someday, but not public policy today.
By Shagun Bali and Alexander Tabb, TABB Group
Originally published on TABB Forum
The Consolidate Audit Trail is one of those unique initiatives that the capital markets community agrees is important. The details, however, are reason for concern. Who will pay for the CAT and how remains the No. 1 question. But implementation timelines, data challenges, and how to incorporate options market data all remain critical challenges.
The Consolidate Audit Trail is one of those unique initiatives that the capital markets community agrees is important. When completed, it will be the single largest repository of financial services data in the world. The CAT will house more than 30 petabytes of data, connect to approximately 2,000 separate data providers, and enable regulators to reconstruct market activity at any point in time.
According to TABB Group interviews with 100 financial institutions from the buy and sell sides, the majority of the industry agrees that the CAT is necessary; everyone recognizes the benefits. But what concerns market participants are the details.
When questioned about the importance of the CAT, more than three-quarters of respondents said they viewed the CAT as an “important” or“critically important” element that contributes directly to the health and well-being of the US markets (see Exhibit 1, below).
Exhibit 1: Market Perceptions Regarding the Importance of the CAT
However, the uncertainty in the process – which includes funding, implementation timelines, data challenges, and new participants from the options markets – has the community concerned. Cost and funding of the CAT is surely giving the community sleepless nights. First, the direct and indirect costs associated with the CAT are a concern for the broker-dealers, as they recognize that all funding avenues lead directly to their doorstep. In addition, they are deeply concerned over the fact that not only do they have to pay for the development and upkeep of the CAT, they also will need to cover the costs of FINRA’s Order Audit Trail System (OATS) and the SEC’s Electronic Blue Sheet (EBS) requests for at least five years after the CAT is started.
Yes, the CAT is necessary. But the big question among many on the sell side remains, “Can the industry afford it?” The broker-dealers need from the SROs a solution that will lighten their burden of investment and that will reassure them that the industry can indeed afford it.
In addition, elements related to data – gathering, storing, and data usage and governance – need heightened attention. To win the wholehearted support of the industry, the SROs need to put out clear strategies that address these challenges. The B/Ds understand the requirements, but ultimately are still uncomfortable with the idea of supplying this type of data with so many ambiguities left unanswered. The SROs need to address these issues head on and need to develop a solution that takes the concerns seriously – especially when it comes to data security and governance.
Furthermore, both TABB Group and the community recognize that the real wild card in the CAT process is the options market. Previously under-appreciated, adding options to the CAT mix greatly increases the complexity of the endeavor. A naiveté has been replaced with a clear understanding that incorporating the options markets into the CAT is no small feat and that whomever is tasked with this undertaking needs to understand all of the implications involved.
The same can be said of the need to solve the data storage and government questions, as well as the security and control issues associated with the program. Unfortunately, the CAT is a unique project, one whose size and scale are unmatched within the institutional capital markets. This means that the SROs do not have the luxury of learning from other people’s mistakes. They have to figure this all out in advance, with everyone looking over their shoulders and trying to influence the outcome.
Getting this right is critical for the success of the project. Market confidence is so fragile that authorities cannot afford to make mistakes in such harsh market conditions, when volumes are low and each participant is struggling with its bottom line numbers. Success is only possible if the SROs prioritize these key elements of the CAT and select a bidder that can deliver against all of the challenges. The entire onus and responsibility of the CAT’s success lies on the SROs’ ability to work out the problems and choose a solution that is in the best interest of the markets, and not their own.
By Shagun Bali and Alexander Tabb, TABB Group
Originally published on TABB Forum
The complexity of our market structure and underlying technologies surpasses our current ability to monitor, analyze and reconstruct market events. If the US wants to maintain its predominate position as a global finance center, the SEC and the SROs need the ability to proactively review and analyze events that occur within the markets as whole.
Today’s market structure is not just complex and fragmented, it is dynamic, with trading activity shifting across multiple exchanges, asset classes and hyper-connected marketplaces. Though equities, OTC equities, options and futures all comprise market events, each is an independent market with its own ecosystem and regulatory infrastructure. But while each asset class is unique unto itself, they are inextricably linked. Unfortunately, the complexity of our market structure and the underlying technologies surpasses our current ability to monitor, analyze and reconstruct the events that shape our economic destiny. Recognizing these gaps, the SEC mandated the Self-Regulatory Organizations (SROs) to develop the CAT NMS Plan and propose the Consolidated Audit Trail, which would create a unified system to enable market reconstruction and analysis.
The need for the CAT is made somewhat self-evident by the markets’ inability to reconstruct some of the near-catastrophic events that have occurred in the past few years. The Flash Crash and the Madoff scandal, for example, seriously undermined invetsors’ confidence in the US markets. While the markets have been able to regain much of their swagger since, another such event with similar outcomes and indeterminate causes could be disastrous. The mere fact that neither the SEC or the SROs were able to reconstruct accurately the eventsthat led up to these disasters is unacceptable in today’s data-centric world. If the US wants to maintain its predominate position as the leading global economic center, the SEC and the SROs need the ability to proactively review and analyze events that ocur within the markets as whole.
The CAT will be the ”go to” system for regulators and exchanges to examine and analyze market activity in its totality. While it would not directly prevent future flash crashes from occurring, it would indirectly prevent these and other potentially disastrous events by enabling rapid reconstruction and analysis of market events, which in turn would protect the markets as a whole. The CAT initiative is the SEC’s main tool in its strategy to become more proactive and preventative and to take a more comprehensive and timely approach to market events.
Though initiated by the SEC, the CAT now is in the hands of the SROs. The SROs have downsized the bidding list and are in the process of selecting the CAT processor and finalizing the technical details. In July 2014, the SROs announced the final short-list of CAT bidders that included the following firms/consortiums:
AxiomSL & Computer Sciences Corporation (CSC)
CATPRO Consortium: HP, Booz Allen, Buckley Sandler, J. Streicher Analytics
EPAM Systems & Broadridge
SunGard Data Systems Inc. & Google
Thesys Technologies, LLC
There is no doubt that a program such as the CAT is what the industry needs. But the SEC does not have the budget or the political support in Congress to take on a project this large and/or complicated. As a result, the SEC put forward Rule 613, placing the CAT squarely in the laps of the SROs. By letting an industry consortium take over responsibility for the CAT, the SEC has been able to advance its needs for a sophisticated analytical tool without imposing a new bureaucracy on the markets that would require taxpayer dollars. However, the phrase “Too many cooks spoil the stew” comes to mind when summarizing the CAT process at present.
For their part, the SROs have been working with the broker-dealers, since they are the ones that are going to pay for the CAT. But each participant within the community has its own views concerning the CAT. It would appear that getting everyone in sync is surely as daunting as building the CAT itself. Consequently, the continually moving goalposts and additional requests for more information from vendors, along with the exemptive relief request filed in January 2015, mean the process still has a long way to go before it is finished.
Though the community at large is supportive of the initiative, there is a considerable amount of mistrust over the lack of transparency in the process. The biggest questions still unanswered include who exactly is going to foot the bill through the development phase, and how broker-dealers are going to pay for the CAT.Complying with OATS reporting system has been painful enough for the industry; market participants do not want to go bankrupt with the implementation of the CAT.
From TABB Group’s perspective, the CAT is a necessary tool for the 21st Century. The SROs and exchanges need timely access to a more robust and effective cross-market order and execution audit trail. However, the SROs need to tighten up the process and set definite targets against which they can deliver in a timely fashion.
In theory, this should not pose a problem; but in reality, the SROs are not a unified group, and as such, they bring their own challenges to the table – which in turn makes the task even more daunting. The current challenge with the CAT program is that nobody wants to take responsibility for this massive undertaking. Though the SROs did not initiate the CAT, if this project does not deliver what it promises, the SROs will be first in a long line of participants that will take the blame for its failure.
The CAT is the largest data undertaking ever proposed for the US securities market. Clearly, there is a lot at stake here. A lot of time and effort have gone into getting the market to approve and support this critical initiative. Now it’s in the hands of the 10 SROs to make sure that if Humpty Dumpty falls off that wall, we can accurately reconstruct what occurred and ensure it doesn’t happen again.
By George Bollenbacher, Capital Markets Advisors
Originally published on TABB Forum
All of the world’s swap regulators recognize that reporting is a mess. And while the SEC’s final rule on Swap Data Repositories does not mandate SDRs monitor reporting data quality, there are signs that such monitoring may be in the offing. But don’t bet on the SEC getting the rules right.
In my last article, I reviewed the SEC’s final and proposed rules on transaction reporting by market participants (“Missed Opportunity: The SEC Finally Weighs in on Swaps Reporting – Part 1”). In this article I will look at the final rule on SDRs, and make some observations on the effectiveness of current and future reporting regimes.The SEC’s final SDR rule is entitled “Security-Based Swap Data Repository Registration, Duties, and Core Principles” and runs some 468 pages. Don’t worry – you don’t have to read them all; just go to page 424 to find the beginning of the rule text. The bulk of the rule is in §232.13, which itself is divided into 12 subsections:
240.13n-1 Registration of security-based swap data repository.
240.13n-2 Withdrawal from registration; revocation and cancellation.
240.13n-3 Registration of successor to registered security-based swap data repository.
240.13n-4 Duties and core principles of security-based swap data repository.
240.13n-5 Data collection and maintenance.
240.13n-6 Automated systems.
240.13n-7 Recordkeeping of security-based swap data repository.
240.13n-8 Reports to be provided to the Commission.
240.13n-9 Privacy requirements of security-based swap data repository.
240.13n-10 Disclosure requirements of security-based swap data repository.
240.13n-11 Chief compliance officer of security-based swap data repository; compliance reports and financial reports.
240.13n-12 Exemption from requirements governing security-based swap data repositories for certain non-U.S. persons.
The Boring Stuff
As we can see from the list above, the first three sections of the rule pertain to registration as an SDR, or, as the SEC abbreviates it, SBSDR (except that the regulator very seldom abbreviates it). Given that SDRs have been functioning in the US for more than a year, it would be astonishing if the SEC had significantly different registration requirements from the CFTC’s, and it doesn’t. So 13n-1 through 13n-3, 13n-6 through 13n-8, and 13n-11 are pretty much as expected.
Items of Interest
In light of the recognized problems with reporting accuracy, the following wording in 13n-4 bears examination:
(b) Duties. To be registered, and maintain registration, as a security-based swap data repository, a security-based swap data repository shall:
(7) At such time and in such manner as may be directed by the Commission, establish automated systems for monitoring, screening, and analyzing security-based swap data;
13n-5 has similar wording:
(i) Every security-based swap data repository shall establish, maintain, and enforce written policies and procedures reasonably designed for the reporting of complete and accurate transaction data to the security-based swap data repository and shall accept all transaction data that is reported in accordance with such policies and procedures.
So far, none of the regulators have mandated any responsibility on the part of the SDRs to monitor data quality, nor have they laid out any guidelines for doing so. However, there are signs that such monitoring may be in the offing, and this language lays that responsibility squarely on the SBSDR. How extensive the monitoring might be, how the regulators would verify that it was being done, and what the penalties would be for failing in this function aren’t covered here. And, since 13n-4 is the only place in the rule text where the term “monitoring” is used, it isn’t covered anywhere else in the rule or, as it turns out, in the preamble.
The Current State of Affairs
In January 2014, the CFTC issued a proposed rule called “Review of Swap Data Recordkeeping and Reporting Requirements.” The comment period ended May 27, 2014. I haven’t been able to find any comment letters on this proposal on the CFTC’s website, nor any final rule on this subject.
So how accurate is swaps reporting today? I took a look at a snapshot of the most liquid swaps category, rates, from the DTCC SDR site and posted it below. The questionable items are in red.
Just to help us read the table, the first item is a new, uncleared ZAR three-month forward rate agreement beginning 5/18 and ending 8/18. The notional amount appears to be ZAR 1,000,000,000, and the rate is 6.12%. With that as background, let’s look at some of the anomalies.
Item 4 is a new two-year USD basis swap beginning 9/21/2016. A basis swap is normally between two different floating rates, but the underlying assets in this transaction appear to be the same (USD-LIBOR-BBA). I’m not sure what a basis swap between the same rates would be, unless it is between two different term rates, like 1-year and 5-year. However, if that’s true, the report doesn’t tell us, so we are in the dark as to what this trade really is.
Item 7 is a new 8-year Euro-denominated fixed-fixed above the block threshold (that’s what the plus at the end of the notional means), which appears to have gone unreported for two weeks. There is a delay in reporting block trades, but it isn’t two weeks. One of the monitoring functions the regulators might implement would be any trade where the difference between the execution and reporting timestamps is greater than the rule allows.
Item 13 is a new 12-year Euro-denominated fixed-floating swap that appears to be above the block threshold of €110,000,000. What is interesting here is that the 12-year Euro rate at the time was about 0.4%, not 0.824%. If there is no other parameter on this trade, it looks to be significantly off the market, unless there was a large credit risk component.
Item 15 is … what, exactly? It’s a new trade in some exotic that went unreported for 5 days, with no price given, apparently. Since the notional looks like 5,000,000,000 Chilean pesos, or about US$8,000,000, perhaps we don’t need to worry too much about what it really is; but exotics of this size denominated in dollars should cause us to ask just what kind of swap was done, and how much risk it entails.
All of the world’s swap regulators recognize that reporting is a mess. For example, here’s an excerpt from ESMA’s annual report:
“In order to improve the data quality from different perspectives, ESMA put in place a plan which includes 1) measures to be implemented by the TRs and 2) measures to be implemented by the reporting entities. The first ones were/will be adopted and monitored by ESMA. The second ones are under the responsibility of NCAs. This plan was complemented by regulatory actions related to the on-going provision of guidance on reporting, as well as the elaboration of a proposal for the update of the technical standards on reporting, leveraging on the lessons learnt so far by ESMA and the NCAs.” (emphasis added)
However, it is hard to find any mention of such a plan in ESMA’s 2015 work programme.
We might have expected that the SEC, the latest to the swaps reporting party, would have taken pains to get it right and perhaps lead the way to a better world. Since some of its rulemaking is still in the proposal stage, we might still see the regulator get it right. But I wouldn’t bet on it.
By George Bollenbacher, Capital Markets Advisors
Originally published on TABB Forum
Global regulators have missed a golden opportunity to shed light on the opaque swaps market. The SEC, seeking to rectify this, recently issued two final swaps reporting rules and one proposed rule. But the final requirements remain muddy.
The all-important swaps reporting requirement has been badly mishandled by regulators worldwide, missing a golden opportunity to shed some light on this otherwise opaque market. In the US, one of the nagging problems has been that the SEC hadn’t put out its reporting rules, so there was no required reporting on one of the riskiest areas of the market – single-name CDSs.
Recently, though, the SEC took a major step in rectifying this, by issuing some proposed and final rules. So how well did they do? Let’s take a look.
First Things First
Actually, the SEC issued three rules – two final and one proposed – which means that we will have to patch them together to get as complete a picture as we can. The final reporting rule is: Regulation SBSR-Reporting and Dissemination of Security-Based Swap Information. There is also a proposed rule with an identical name, indicating that it will be combined with the final reporting rule at some point. I will cover both of them in this article. I will cover the SDR rule, Security-Based Swap Data Repository Registration, Duties, and Core Principles, in a later article.
Including their preambles, these three rules comprise more than 1,350 double-spaced pages. My practice has always been to go right to the rule text, since that is what everyone will be bound by, and then read any sections of the preambles that provide necessary clarifications. The rules themselves comprise 92 pages, a significantly more manageable reading assignment. I’ll cover only the unexpected or potentially troublesome aspects, but people should read all 92 pages.
In the SEC rulebook, the reporting rules are §§242.900-242.909. Specifically:
242.901 Reporting obligations.
242.902 Public dissemination of transaction reports.
242.903 Coded information.
242.904 Operating hours of registered security-based swap data repositories.
242.905 Correction of errors in security-based swap information.
242.906 Other duties of participants.
242.907 Policies and procedures of registered security-based swap data repositories.
242.908 Cross-border matters.
242.909 Registration of security-based swap data repository as a securities information processor.
There are a few oddities among the definitions, each perhaps a warning about other oddities later on. One is:
“Trader ID means the [Unique Identification Code] UIC assigned to a natural person who executes one or more security-based swaps on behalf of a direct counterparty.”
So that seems to be leading to a requirement to identify the person who executed the trade. Unless, of course, the trade was executed by a computer. Do we use HAL’s UIC then?
There is also this:
“Trading desk ID means the UIC assigned to the trading desk of a participant,” and, “Trading desk means, with respect to a counterparty, the smallest discrete unit of organization of the participant that purchases or sells security-based swaps for the account of the participant or an affiliate thereof.”
So will we be identifying both the desk and the trader who did every trade? That’s not required anywhere else, and certainly looks like overkill.
Under the reporting obligations, we find another oddity:
(a) Assigning reporting duties. A security-based swap, including a security-based swap that results from the allocation, termination, novation, or assignment of another security-based swap, shall be reported as follows:
It looks like we are missing an important section. Sure enough, we find it in the proposed rule:
(1) Platform-executed security-based swaps that will be submitted to clearing. If a security-based swap is executed on a platform and will be submitted to clearing, the platform on which the transaction was executed shall report to a registered security-based swap data repository the information required.(emphasis added)
And one more item in the proposed rule:
(i) Clearing transactions. For a clearing transaction, the reporting side is the registered clearing agency.
I think that means that the SEF reports the original trade, and the DCO immediately reports the cleared trade.
What about life cycle events for cleared swaps? Here, the final rule says:
(i) Generally. A life cycle event, and any adjustment due to a life cycle event, that results in a change to information previously reported … shall be reported by the reporting side, except that the reporting side shall not report whether or not a security-based swap has been accepted for clearing.
Back to the proposed rule:
(ii) Acceptance for clearing. A registered clearing agency shall report whether or not it has accepted a security-based swap for clearing.
So if the reporting side of the original trade is the SEF, and the DCO reports that it accepted the trade for clearing, does the DCO report the life cycle events of cleared swaps? That should be the case, but the rules are a bit confusing about that.
What Transactions Must Be Reported?
This is obviously a crucial question, and the final rule says:
(1) A security-based swap shall be subject to regulatory reporting and public dissemination if:
(i) There is a direct or indirect counterparty that is a U.S. person on either or both sides of the transaction; or
(ii) The security-based swap is accepted for clearing by a clearing agency having its principal place of business in the United States. (emphasis added)
And an indirect counterparty is defined as:
Indirect counterparty means a guarantor of a direct counterparty’s performance of any obligation under a security-based swap such that the direct counterparty on the other side can exercise rights of recourse against the indirect counterparty in connection with the security-based swap; for these purposes a direct counterparty has rights of recourse against a guarantor on the other side if the direct counterparty has a conditional or unconditional legally enforceable right, in whole or in part, to receive payments from, or otherwise collect from, the guarantor in connection with the security-based swap.
So a swap done between, for example, an EU dealer and a guaranteed EU subsidiary of a US corporation is reportable in the US, as well as by both parties in Europe. How fun! And who reports in the US? Back to §242.901.
In addition, the final rule requires reporting of all swaps in existence on the rule’s effective date (called backloading) and, although there is a phase-in for the rule as a whole, there doesn’t appear to be a phase-in period for backloading.
What Data Must Be Reported?
Here, in addition to the usual transaction material, the final rule requires:
(2) As applicable, the branch ID, broker ID, execution agent ID, trader ID, and trading desk ID of the direct counterparty on the reporting side;
Since only one side is reporting under the SEC rule, in dealer-to-dealer trades this appears to mean that the reporting dealer must supply all of this information, but not the non-reporting dealer. What that accomplishes, I’m not sure.
There’s one other data requirement in this section:
(5) To the extent not provided pursuant to paragraph (c) or other provisions of this paragraph (d), any additional data elements included in the agreement between the counterparties that are necessary for a person to determine the market value of the transaction;
Thus it appears that the reporting party must determine what data is necessary for an outside entity to price the transaction, and include that if it’s not already delineated.
This section requires immediate public availability of the usual information (i.e., no identification of the parties) with this exception:
(3) Any information regarding a security-based swap reported pursuant to § 242.901(i);
And 242.901(i), in the proposed rule, says:
(i) Clearing transactions. For a clearing transaction, the reporting side is the registered clearing agency that is a counterparty to the transaction.
Does this mean that cleared trades are reported but aren’t publicly available? If so, what is the logic for that? If not, what does it mean? Beats me.
There is a significant section in the final rule called § 240.901A, covering reports the Commission is expecting from the staff “regarding the establishment of block thresholds and reporting delays.” The Commission will use these reports to determine “(i) … what constitutes a large notional security-based swap transaction (block trade) for particular markets and contracts; and (ii) the appropriate time delay for reporting large notional security-based swap transactions (block trades) to the public.” One of the considerations the rule highlights is “potential relationships between observed reporting delays and the incidence and cost of hedging large trades in the security-based swap market, and whether these relationships differ for interdealer trades and dealer to customer trades.” So block sizes and block reporting delays haven’t been decided yet.
Finally, the final rule defers the compliance dates to the proposed rule, and although the rule itself doesn’t say, the preamble lists two phases:
Compliance Date 1 – Proposed Compliance Date 1 relates to the regulatory reporting of newly executed security-based swaps as well pre-enactment and transitional security-based swaps. On the date six months after the first registered SDR that accepts reports of security-based swaps in a particular asset class commences operations as a registered SDR, persons with a duty to report security-basedswaps under Regulation SBSR would be required to report all newly executed security-based swaps…Registered SDRs would not be required to publicly disseminate any transaction reports until Compliance Date 2.
Compliance Date 2 – Within nine months after the first registered SDR … commences operations … (i.e., three months after Compliance Date 1), each registered SDR in that asset class …would be required to comply with Rules 902 (regarding public dissemination), 904(d) (requiring dissemination of transaction reports held in queue during normal or special closing hours), and 905 (with respect to public dissemination of corrected transaction reports) for all security-based swaps in that asset class—except for “covered cross-border transactions.
So six months from sometime for reporting, and nine months for public disclosure.
Given the long delay between the CFTC’s reporting rules and these, we might expect that there would have been considerable communication between the agencies, and there might have been. It does appear that the CFTC is totally re-examining its reporting rules, and that might be a good thing. Meanwhile, as firms get ready to report SEC-regulated swaps, the situation still looks pretty muddy. It might get better, but I’m not very optimistic about that.
Imagine you had the last five years of derivatives market reform on DVR. If you could fast-forward past the requests for public comment, rule delays and angst, would you have guessed that we’d be where we are today?
Future-casting the outcome of financial markets reform is not for the faint of heart. But it is an art in which Kevin McPartland has had some success over the last several years. As a principal, overseeing market structure and technology for Greenwich Associates, McPartland is responsible for helping the world’s leading financial firms decode nascent trends and interpret emerging intelligence to make strategic decisions.
McPartland also holds the distinction of authoring the most-read blog post in DerivAlert history. His SEF 101: Deconstructing the Swap Execution Facility, written in 2010 when McPartland was a senior analyst at Tabb Group, was a seminal piece on the topic long before most market participants had ever heard of a swap execution facility (SEF). Now that we’ve all become familiar with SEFs, we thought it would be a good time to check back in with McPartland to see what he thinks the next few years of derivatives market reform would have in store for us.
DerivAlert: Given all of the events of the last five years -- derivatives reform, increased electronification of swap trading, Basel capital requirements, QE -- How do you see the trading in derivatives evolving over the next five years?
Kevin McPartland: It’s great that we’ve got a lot of the major rules in place. It’s good that we’re finally here, but it’s still very much early days. For clients that do not want to trade on SEFs, there are still plenty of ways to do that. Market participants need to feel incentivized to increase trading volume on SEFs, and the product sets that are required to trade electronically need to become larger in order to make the shift to SEFs real.
In terms of looking at who the winners and losers are in SEFs, the separation is starting to take shape, but it is still very early. It’s also important to look at the client make-up of different SEFs, which are very different. That has a big influence on volumes.
DA: What do you see coming down the pike for fixed income?
KM: The Treasury market is looking more and more like it is ripe for continued electronification. It is standardized and highly liquid. Nearly every financial firm is involved in Treasurys in some way shape or form. This is in contrast to the corporate bond market.
Our North American Fixed Income Study last year showed that 78% of clients we talked to were using electronic platforms to trade bonds. That means a big chunk of the market are already using electronic platforms in some way. But only 50% of notional volume is traded electronically, which outlines a huge opportunity for growth.
In credit, the story hasn’t really changed much. The structure of the market is such that there are so many issues that it’s hard for deep liquidity to grow in any one particular spot. For example, you have one IBM stock, but you could have upwards of 50 IBM bonds to choose from. That makes it tough to build deep liquidity in corporate bonds.
The real opportunity for electronic trading in credit is in bond selection. The major platforms are all innovating in this space and we expect that to be a growth area over the next several months. There’s still a long way to go, but a shift is starting to occur whereby investors are moving away from bond-specific thinking and toward a risk-based approach. Instead of saying ‘I want this IBM bond,’ they are saying ‘I’m looking for this type of credit exposure, what are my options?’
DA: What are your expectations for European derivatives reform?
KM: U.S. reforms have been complicated because the CFTC and SEC are jointly writing rules on Dodd-Frank. Europe has a dozen jurisdictions that need to write rules and get them accepted for all of their markets. The first thing we’ve seen is trade reporting, and by all accounts it’s been really messy.
As it stands now, the reporting requirement for both sides of a transaction largely defeats the purpose of the rule. In terms of the first clearing mandates, we’re expecting to see something maybe by the end of 2014/2015.
European reform is not a cut and paste of the U.S. The legal framework about how clearing works is very different in Europe, and the clearing rules are very different.
DA: What impact do you see the May 1st guidance on packaged trades having on SEFs?
KM: We’re still waiting for lots of liquidity providers to come into the market. It’s going to be a slow, organic process as some of the new products come online.
The CFTC’s guidance laid out a phased in approach for packaged transactions, starting with packages containing two or more MAT instruments and quickly expanding to include MAT swaps over US Treasuries. While the marketplace is certainly ready to handle the electronic execution of these packages, the operational infrastructure needed to risk-check and process these trades will struggle to be prepared by the deadline.
By Henner Bruner, Capco
Originally published on TABB Forum
It is still probably too early to derive meaningful conclusions from the impact of Swap Execution Facilities on trading behavior. However, European regulators and counterparties can learn from the US experience as they implement the European equivalent of SEFs, Organized Trading Facilities, as part of the Markets in Financial Instruments Regulation.
Although central clearing provides counterparty credit risk mitigation, SEF trading – because it will not become mandatory until the ‘made available to trade’ (MAT) rules are effective – is creating uncertainty and onboarding complexity rather than immediate economic benefits.
Why the uncertainty? Potential regulatory arbitrage between the Commodities and Futures Commission (CFTC) and the Securities and Exchange Commission (SEC) is one factor. Then there’s confusion about implementing the SEF trading rules. In addition, the actual start date for mandatory SEF trading varies on the one hand between the official deadline of 18 December 2013 and the market consensus estimate of Q1 2014.
Then there’s the complexity of these new rules where pre-trade credit checking involves feeding credit limits into the SEFs systems. This can easily amount to a high 5-digit number of credit limits a day (intra-day).
Add to this the operational implementation of the direct push, ping or hub approach. This is burdensome, as is the legal and operational documentation, which buy-side participants and futures commission merchants (FCM) may struggle to complete on time.
Meanwhile, in Europe there are many implications for regulators and counterparties concerning the implementation of the still-to-be-defined OTF, while dealing with the widely cited "Footnote 88." The note states that all multi-lateral trading in all swaps, as defined by the CFTC, must occur on SEFs.
And, since the US is months, maybe years, ahead in shaping the future derivatives trading space, there is the risk (or even fear) that US rules are being imposed on European counterparties.
To sum up, the role of US and non-US persons interacting with SEFs is not clear. This is bad news for European regulators who dread a negative operational impact on foreign trading platforms in which US banks participate. Non-SEF platforms already discriminate against non-US branches of US banks by excluding non-US accounts with liquidity pools. Therefore, firms might shy away from trading in the US or on SEFs, to avoid being subject to US regulatory requirements.
First lessons learned:
~ Regulatory differences (EU versus US) currently dampen the road to substituted compliance regarding pre-trade transparency rules. As a result, OTF guiding rules might be altered in the process of implementing MiFIR.
~ The CFTC should grant dealers and SEF operators outside their direct regulatory reach a no-action relief period until OTF rules have been finalized.
~ Avoid confusion among market participants: establish concise guiding rules for OTFs, allowing sufficient time for technical and operational implementation, and avoid regulatory arbitrage between MiFIR and linked regulations (e.g., EMIR).
By David B. Weiss, Aite Group
Originally published on Aite Blog
The usual legal industry of lobbying, commenting, advising, etc. that the CFTC and SEC have created aside, it sure does seem like the CFTC is driving a fair amount of business for litigators these days:
Sure makes it interesting for the spectator. Of course, not all market operators have taken that route. Some have just asked to be let off the rules for a while. Bloomberg is noted far more for being “sticky” then litigious, but when it decided to step up to the plate, it did so in a big way, choosing Eugene Scalia (and former governor of New York, Mario Cuomo) to make its case. Scalia has a pretty good record when it comes to these regulatory lawsuits, so it was pretty bold of the CME to make light of Bloomberg’s lawsuit, given their own track record, detailed above, against the CFTC. How ironic that, hours later, the DTCC would sue the CFTC in direct response to the favor it believes was shown to the CME (and ICE) on SDRs.If the CFTC and SEC felt overwhelmed by their new regulatory tasks stemming from Dodd-Frank, then these latest two regulatory arbitrage opportunities created by the CFTC were not the right steps to take. Now they’re being sued on two fairly substantive grounds.