Swap derivative officials called on federal regulators Wednesday to enhance transparency in the $600 billion-plus derivatives markets, but not to the point where it could restrict liquidity .
“The new SEF [Swap Execution Facilities] environment should require a level of transparency that does not hamper liquidity…Liquidity maintenance or preservation is of paramount importance,” said Julian Harding, executive director of Tradition Brokerage and chairman of the Wholesale Markets Broker Association Americas, during the second day of a roundtable by the staffs of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
“We should conduct marketplaces that insist upon the highest level of transparency that does not hamper liquidity,” he said.
The sweeping Dodd-Frank Wall Street reform bill, which President Obama signed into law in July, “formally christened” the SEF term, but it’s still not known whether SEF will become merely a new label for existing businesses or conversely open the door for competition, innovation and transparency in over-the-counter (OTC) derivatives price discovery and execution, wrote an analyst with TABB Group in a recent article on SEFs (see Daily GPI, July 22).
“If you move derivatives into a SEF environment, which is largely electronic, I think one of the outcomes is you’re going to have more participation; you’re going to have more prices coming in; and you’re going to have more pre-trading price transparency. It’s hard to talk about each of these bits of the legislation in piecemeal because I think they all are interrelated,” said Tradeweb CEO Lee Olesky.
“The block rules are tied to RFQ (request for quotes), which is tied to liquidity issues, which is tied to pre-trade price transparency,” he noted. They need to be viewed “holistically,” he said.
Richard DuFour, executive vice president of the Chicago Board Options Exchange, said he endorsed these positions. “I would add to [them] the importance of…the issue of a firm quote. If I’m going to be able to trade anonymously and I put in a quote, I have to be held to it for a period of time.”
In response to concerns about pre-trade transparency potentially risking liquidity, CFTC Chairman Gary Gensler said there were “plenty of ways to do pre-trade price transparency” without jeopardizing liquidity.
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