ISDA – INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, INC.
PRESS RELEASES
For immediate release, Tuesday, March 29, 2011
For more Information, please contact:
Deirdre Leahy, ISDA New York, + 1 212-901-6021, dleahy@isda.org
Rebecca O'Neill, ISDA London, + 44 203 088 c(1998) 3586, roneill@isda.org
Donna Chan, ISDA Hong Kong, + 852 2200 5906, dchan@isda.org
NEW YORK, on Tuesday 29 March 2011 – in an article published today, the International Swaps and Derivatives Association, Inc. (ISDA) describes his view of the role, impact and optimum structure for Swap execution facilities (SEFs *) in the over-the-counter (OTC) derivatives markets worldwide.
SEF fundamentals
ISDA think SEFs can play a positive role in the OTC derivatives market by strengthening their infrastructure, helping prevent insider trading and other market abuses, and increasing transparency and access for smaller participants. To achieve this potential and become an effective marketplace, need to offer derivatives SEFs users general election in the trade of at very low cost. SEFs to structure, including:
It is also important that individuals are not discriminated against by central SEFs Clearing organizations in terms of access and pricing.
* SEFs is a type of trading system, as defined in the United States by Dodd-Frank Act (DFA). The law requires derivatives subject to mandatory Purge trade on them, provided that such derivatives are made available for trading by the SEF.
Financial market structures and trade
In the paper noted the ISDA also the significant differences between the various segments of financial markets and how trade has developed in these. Traded futures markets are characterised by a broad spectrum of trade customers (including retail) margin requirements for a small number of highly standardized contracts in relatively small quantities. As a result, the liquidity situation of listed equities markets relatively continuous nature.
The number of potential buyers and sellers of over-the-counter derivatives markets, however, is relatively small. Active participants are sophisticated institutions that expand very competitive prices from multiple resellers. Trade consists of a wide range of less standardised products. Lines are usually much larger and less frequent. Liquidity is highly variable and depends very much on a distributor that prices for clients.
Various structures have also arisen in other market segments. This includes the trading of US Treasuries, undoubtedly one of the most liquid financial instruments. A large part of the trade in so-called "on-the-run treasuries, the most recent and most liquid, carried out on electronic trading platforms. Much of the beings in the older "off-the-run Treasuries are still being made via wholesale brokers and directly between dealers. There is no requirement that all trade entirely on electronic platforms.
Review of current regulatory proposals
ISDA believes that regulatory proposals in SEFs for mandatory use of derivative trading should be based on the core principles in the paper and the structure of OTC derivatives. The Association proposes in his paper, several areas for improvement:
To determine if a product which derivatives are available for trading by an SEF: The CFTC proposes to delegate this task to the SEF, and further suggest that if a SEF has made such an assessment, all would be required to treat the SEFs swap made available for trading.
The proposed rule does not specify, but no specific criteria for determining if a product which the derivatives liquidity for trading. CFTC should be specified that a contract subject to mandatory clearing does not automatically make it available to the trade and that the agreement must also meet the minimum liquidity requirements and standardisation.
The proposed rule also creates a misalignment of interest in this SEFs will have all the incentive to declare a product available for emissions trading to capture market share. In addition, if a product trade very rarely and each trade is conducted is known to the entire market as a result of the SEF, the participants to be very careful with positions. The result will be less liquidity and inferior prices for users. To eliminate this conflict and its negative consequences, should the CFTC do "available to trade" determination-public notice and comment.
Requires the SEFS either books or request for quote (RFQ) facility. ISDAS paper argues that this requirement is an unnecessarily narrow interpretation of the DFA. It is difficult to see the advantage of requiring only two types of holdings to qualify as SEFs when other types of plants can be easy to achieve the objectives of the DFA.
CFTC further States that a participant who uses an RFQ must send the request to a minimum of five participants. This seems to be another example where the CFTC is more precise and restrictive than it need be. DFA States that players must only have the ability to accept multiple bids or offers-not that they are obliged to request them.
Call for bids or offers from five dealers can make retailers reluctant to aggressively price entry which at least four other market actors are aware of their winning position. There may be other swaps that represent breeds for confidential transactions and should not be presented to five dealers. The requirement of five retailers limit how participants working in markets where it is not clear purposes. The requirement is bound to reduce liquidity.
About ISDA
ISDA, representing the participants in the privately negotiated derivatives, is one of the world's largest global financial organizations as measured by the number of member companies. ISDA was chartered in 1985 and currently has over 800 member institutions from 55 countries on six continents. These members include most of the world's major institutions such as the private negotiated derivatives, like many businesses, governmental entities and other end-users based on OTC derivatives to manage efficiently financial market risks with their economic core activities. Information about the ISDA and its activities, visit the Association's website: www.isda.org.
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