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Either method would set the bar far too low, critics claim, primarily because swaps tend to trade infrequently and in large size – meaning large transactions that don’t qualify as block trades would be subject to the pre-trade reporting requirements. “If applied as proposed, without modification and further study of market and product characteristics, the definition of block trade has great potential to adversely affect the ability of end-users and others to execute and hedge large transactions, because informing the market of a potential large transaction may move the market against the person seeking the transaction,” the Isda/Sifma letter reads.

Even if a deal does qualify as a block trade, it must be reported to a swap data repository after a delay of 15 minutes, with the transaction and pricing data then reported to the public. This has also touched a nerve with dealers and other market participants, who claim that delay will not give them enough time to hedge, particularly in less liquid instruments or maturities.

“If information about a block trade gets publicly disclosed too quickly, it will inhibit the ability of the dealer transacting that block trade to actually pass the risk on and hedge itself. There is no one-size-fits-all approach and setting one time delay that works across all asset classes and trade sizes is difficult. What is most important is to hit the right balance between providing market transparency while not interfering with market liquidity,” says Olesky at Tradeweb.

It is not all criticism, though. Many participants point out Sefs can increase transparency and market access. Trade platforms are certainly looking forward to the opportunity. For dealers, the challenge will be keeping hold of the client relationships.

BOX

CFTC versus SEC

Swap execution facilities (Sefs) were introduced to the lexicon of derivatives market reform by the Dodd-Frank Act, which gives them the role of gatekeepers to the world of over-the-counter clearing. But it’s up to the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to draw up detailed regulation governing these new entities. And the two regulators, which are responsible for different types of OTC products, don’t agree on what’s required of a Sef.

Dodd-Frank says all cleared swaps need to be executed on a board of trade designated as a contract market or on a Sef – defined as a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, by any means of interstate commerce. Since the legislation passed into law last July, both the CFTC and the SEC have been working to put flesh on these bones. The CFTC was first to the table, publishing its notice of proposed rule-making on January 7.

The rules are detailed, but a crucial issue concerns the requirements for request-for-quote (RFQ) systems. Essentially, a Sef must provide basic functionality to allow market participants to make executable bids or offers and indicative quotes and display them on a centralised electronic screen that can be seen by multiple parties. So long as it has this ability, a Sef could provide an RFQ system for those who want to interact with a limited number of market participants. However, RFQs must be sent out to a minimum of five counterparties in the trading system or platform, according to the CFTC draft.