OTC Derivatives Reform (Trading of FX instruments subject to Dodd-Frank requirements, principally FX options and non-deliverable forwards (NDFs), is set to experience unprecedented changes in the face of proposed regulatory reform. The ultimate outcome remains uncertain but the next few months will undoubtedly be a period of adjustment and adaptation.
The Commodity Futures Trading Commission’s proposed rules regarding swap execution facilities (SEFs) have highlighted the unique nuances and requirements of the FX market and its participants. In a recent CFTC public meeting chaired by Commissioner Scott D. O'Malia, potential SEFs were called on to discuss the proposed rules. (Editor's note: Read tweets from TABB Group's Larry Tabb and Kevin McPartland from the SEF Showcase here.)
One area of concern regarding the CFTC’s proposed rules for SEFs is that they take away the end user’s flexibility to direct transactions to whomever they think is best suited for a specific trade. Under these proposals the client would not have the freedom to choose how they want to trade. End users’ ability to best hedge their risks and meet their business requirements can be compromised to the extent they are forced to trade with and disclose market information to multiple counterparties.
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3 Comments to "Dear Mr. Regulator: Flexibility Needed for Forex SEFs":
John H Eley
12 May 2011
Phil: Thoughtful post. While the aims of DF are laudable, the devil is always in the details. You have highlighted an area where the rules, as currently articulated, may well have the opposite of the desired outcome
Anonymous
12 May 2011
This reminds me of when the markets were being converted to electronic ones. Remember the outcries over who they should be able to trade with and the “added value” delivered, a value which electronic markets could never achieve? Today, a representative of a firm has an obligation to obtain the best result for their organisation and stakeholders, which often is interpreted as the best price. In no way does the organisation benefit from rewarding the intermediary who buys the best steak dinner! It does not make sense to continue to limit the choice of market participants to those they have legal agreements with when other entities may offer a better price. These products have become standardized and the market needs a better and more cost effective way to trade that will improve efficiency and drive liquidity up, benefiting all participants and not just the intermediaries. Intermediaries will find other ways to add value much like they did when open outcry died. David Collins SuperDerivatives
udisela-superderivatives
13 May 2011
If indeed end clients would be prohibited from choosing the counterparty for a trade, one should consider client/bank relationship and the impact on best execution in ALL market conditions. In a calm market receiving a competitive quote should prove quite an easy task. However, in a very fast market as we experienced last two weeks and most noticeably in XAG/USD (Silver) trading, I suspect not many market makers would bother making a meaningful price to an anonymous market taker . Consider a client long Silver trying to get out of position when Silver touched 49 and then gapped down by full dollars during a very short time (from 49 Dollars to once all the way down to 33, up to 39 and now around 34-35), or another client screaming to buy Gamma. Typically, global banks valuing their clients’ business, can’t always provide the best quote in the market, but would always provide decent quotes to their clients at any market condition and thus enabling their clients to trade.
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