Aite Group analyst David Weiss answers FTF News’ questions about the CFTC’s push for packaged trades via SEFs.
A senior analyst with Aite Group, David Weiss will be hosting a panel on packaged trading, “Taking the Whole Package,” for the DerivOps NY conference, sponsored by Financial Technologies Forum (FTF), and taking place Nov. 6. He took time from his schedule to answer FTF News’ questions about package trades and the pending changes to come.
At Aite, Weiss covers global listed and over-the-counter (OTC) derivatives, electronic trading, global financial regulation, and capital markets intellectual property “with a subtle undercurrent of trading technology,” according to the Aite website.
Prior to joining Aite, Weiss was an independent analyst, director of global derivatives technology at Cantor Fitzgerald, and a technical architect at Nextera Interactive, focusing on equity research management systems, according to the Aite website.
He moved to Aite with more than a decade of global institutional capital markets experience in listed and OTC derivatives, cash equities, securities lending, electronic trading, and trading technology working side-by-side with brokers, sales traders, and traders as a project manag1er, product manager, analyst, and IT manager.
Q: In your opinion, how has the Dodd-Frank Act requirement that package trades be cleared as whole units rather than as individual pieces worked out so far?
David Weiss, senior analyst, Aite Group.
A: Thus far, only two of the five packaged trade categories the CFTC issued [via no-action-letters] back in May have gone live, and those were the relatively easy ones. The other three will hit in a just few weeks (Nov. 15) so for them, only time will tell.
As for clearing specifically, the CTFC extended the ‘new trade, old terms’ relief at the last minute to February. Given their past NAL issuance, many SEFs and market participants are hoping for the best, which would be yet more extensions, but preparing for the worst, go live.
There remains some unease that the SEC has yet to issue final regulations or really say much on the Treasury component of the secondcategory of packaged trades.
So, overall one could best say that what’s in effect has worked out, but most [of the regulations] have not yet had a chance to work out or fail. And, moreover, given the prevalence of RFQs [requests for quotes] over CLOBs [central limit order book], all this has happened in the less stressful of the two execution types.
Q: How would you characterize the CFTC’s ‘phased compliance timeline’ decision?
A: It’s been a bit of a necessary mess, not so much because of being ‘phased,’ but rather all the NAL extensions, particularly at the last minute.
So, the timeline is really more of a long and winding road. It was certainly prudent of them to decide against a big bang, and I don’t think this has been perceived as ‘kicking the can,’ as has been the case with most other G20 regulatory bodies.
But, nonetheless great uncertainty remains in the OTCD market. That said, the additional layering of the CFTC’s separate approval of the CME’s Rule 538 does bring new meaning to ‘phasing’ when it comes to invoice spreads.
Q: How ready are firms for the onset of the November 15 package trade guideline?
SEFs [swap execution facilities] and sell-sides have been preparing, and most say they’re ready. However, this hasn’t been in a live trading environment under stress. Most will readily concede they’d welcome yet another NAL relief extension.
Q: What is the likelihood that the CFTC’s actions on package trades will make SEFs more attractive to buy-side firms?
Not likely. CLOBs and access to traditionally D2D [dealer-to-dealer] SEF liquidity are higher up on their list if they are to go all-in on SEFs. I’d characterize most buy-side view of this as another set of hoops they’ll reluctantly have to jump through. Most everybody is also waiting to see if the CFTC will revisit the CME’s Rule 538 or allow it to stand.
Packaged trades on their own are not going to make SEFs more attractive for the buy-side, especially for most trading invoice spreads.
Q: What operational changes have firms had to consider to embrace the new rules for package trades?
This is all part and parcel of the sell side’s existing STP and automation efforts, though they’ve had to increase their monitoring efforts. Buy-side preparation is more mixed, frankly all over the map. However, pragmatism is the watchword and many firms as well as the SEFs would welcome additional NAL extension here by the CFTC.
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