Traders warn on deadline for new swaps rules

Swaps dealers have warned a mid-May deadline forcing them to comply with new US rules for over-the-counter trading remains tight, even after a US regulator clarified its positions on some key issues.

The Commodity Futures Trading Commission said late on Wednesday that venues trading US products, and customers in Europe will be required to report trades to US data repositories. They will also provide US officials with monthly reports on the activity of their US customers.

But broker-dealers and trading venues on Thursday were concerned the CFTC held to its May 14 deadline for compliance. US and European broker-dealers, who have been waiting for two months for clarifications, have estimated it could take about four months to finalise their connections and compliance with the US rules.

Market participants are worried the uncertainty and rapid build-out is contributing to a fragmentation of the global market. Research released this week by the International Swaps and Derivatives Association, a trade body, suggested swap execution facilities (Sefs) were likely becoming more US-centric venues. Since the introduction of the first set of final rules in February there have been fewer trades, and of lower value, in non-dollar denominated currencies trading on the platforms, Isda found.

“Evidently, timing is the issue. We didn’t consider the eight weeks to May 14 the CFTC set as sufficient. Now, instead of affirming our request to lengthen that by another six weeks, they have effectively shortened it to only five weeks,” said Alex McDonald, chief executive of the Wholesale Market Brokers’ Association.

“Given the Isda report yesterday about increased fragmentation and the migration of the non-US dollar markets away from the US, this evidently throws as many challenges to market liquidity as it hopes to solve.”

The design seems to be to expect more from MTFs for now until the regular data reporting system is adequate to give CFTC enough visibility into the participation

US and European officials have been seeking to harmonise their tougher over-the-counter derivatives rules, drawn up in the wake of the financial crisis to strengthen against systemic risk. They have sought to avoid loopholes and duplication to avoid stymieing the market, although long-running talks have sometimes been affected by concerns over a turf war.

US rules require that swaps trading be conducted on Sefs but regulators have wrestled with how they monitor US markets participants when they trade with overseas counterparties.

Earlier this year, the CFTC and the EU agreed overseas swaps traders and venues could use alternative, officially-designated European venues known as multilateral trading facilities (MTFs), and set a May deadline for registration.

On Tuesday, the CFTC said European-approved venues must report all swap transactions to one of its registered swap data repositories as if it were a Sef. It has approved repositories operated by the Depository Trust and Clearing Corporation, CME Group and IntercontinentalExchange, and provisionally approved a Bloomberg one.

The CFTC has also been unable to use the vast majority of the data owing to imprecise reporting requirements.

“The design seems to be to expect more from MTFs for now until the regular data reporting system is adequate to give CFTC enough visibility into the participation,” the senior counsel of a major swaps dealer said of the CFTC clarification.

Trading venues must also certify that they are compliant with European rules and submit monthly reports summarising levels of participation and volume by US persons, the CFTC said.