MarketAxess submitted a comment letter to the CFTC on the proposed rules to establish a process for a swap execution facility (SEF) or designated contract market (DCM) to make a swap "available to trade" under the Commodity Exchange Act, as amended by Dodd-Frank. This comment letter addresses the congressional intent for the swap trade execution mandate and outlines the potential impact of the proposed rules.

Client here for more information

The CFTC and SEC issued a Joint Report on International Swap Regulation, as required by Section 719(c) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The commissions were required to jointly conduct a study and then report to Congress on how swaps and sb swaps are regulated in the US, Asia and Europe and to identify areas of regulation that are similar and other areas of regulation that could be harmonized. This study is one facet of the CFTC's and SEC's work in analyzing the international context and implications of the Dodd-Frank Act.

Click here for more information

Rick McVey, CEO of MarketAxess, will be attending the CFTC public roundtable on Monday 30th January, to discuss the proposed regulations to implement the 'available to trade' provision of the Dodd-Frank Act. The round table will be held at the CFTC headquarters in Washington DC. Member of the public can also listen via conference call using the following details:

Listening information:

US Toll-free: 866-844-9416
Passcode: 8082055

Click here for more information

The CFTC held its most recent meeting on January 11th, to consider the Dodd-Frank Act regulations. During the meeting, the CFTC approved final rules related to the segregation of customer funds for cleared swaps, business conduct standards for swap dealers and major swap participants and the process for registration of these entities. The agency also approved for public comment its "Volcker Rule" proposal, which would prohibit CFTC-regulated banking entities from engaging in short-term proprietary trading. The agency also approved an order that grants the authority for swap dealer registration to the National Futures Association, the industry's self-regulatory organization.

CFTC Chairman Gary Gensler gave a tentative schedule of rules to be finalized or considered later this year. According to the schedule the CFTC plans to consider 22 Dodd-Frank rulemakings in the first half of the year. This list includes the "entity definitions" that will define the terms swap dealer and major swap participant, which are being drafted jointly with the Securities and Exchange Commission.

For further information about the meetings click here.

Woodbine Associates recently published its November 2011 study titled: Buyside Corporate Bond Execution: Sourcing Liquidity Under Dodd-Frank. This report follows the opinion piece published in March 2011 titled: Corporates, Credit and SEFs.

The report focuses on current corporate bond trading practices at a range of domestic asset management firms and how these are likely to change as rules are implemented under the new regulation.

"New rules under Dodd-Frank will lead to fundamental changes in the way asset managers source liquidity in the corporate bond market," Sean Owens, author of the report. "This research is unique in that it uses comprehensive survey-based data supplemented by discussion with traders and portfolio managers to substantiate how asset managers are likely to react to changes in the markets. No-one has done research like this to date."

To learn more or purchase the report, please visit Woodbine Associates.

Tabb Group has released a survey of European dealers, which highlights the deep confusion among dealers about how to react to huge swaths of incoming regulation. It found that 68 per cent of 24 of the world's largest brokers were trying to lobby for changes to plans for incoming OTC derivatives reform even as they build the technology to adapt to new rules.

Will Rhode, the analyst who conducted the survey, said there was a marked difference in dealer attitudes towards OTC regulatory reform in Europe compared with the US, where regulatory changes under the Dodd-Frank Act are closer to reality. "Dealers in Europe are comparatively belligerent," said Mr Rhode. "This is because new capital adequacy requirements under Basel III will be so universally punitive within Europe," he added. "There is an overall resistance to change and a sense of indignation that traditional business models are being so thoroughly and comprehensively undermined by authorities."

Read more at the FT (tiered subscription)

Read more on TABB Forum

Executive Summary

US and European governments view banks as too big and too powerful. Now they are taking that power away, changing the rules of the old game so that their profits cannot be as big and so that the industry as a whole, while not killed off entirely, is rendered significantly crippled. Financial market reform will be merciless, unrelenting and severe.

Banks have one of two choices. They can either go to Asia where the anti-industry campaign will be less co-ordinated and less shrill, or they can re-invent themselves. The good news is, dealers are not one-trick ponies and are capable of changing their stripes. The question is: into what? Strategising and seeing the wood for the trees in a time of market stress and financial market overhaul is a challenge.

Dealers are strategically positioning themselves around the incoming transparent trading and central clearing mandate as they see fit, weighing the opportunity cost against the upfront investment to determine which business model they want to be in. Question marks abound. Do I have to be in clearing? Will there be customer demand for clearing services? How will I remain trading relevant? What fate awaits volumes?

The common denominator across all strategies is technology. Whether it be in terms of trading connectivity, reinventing prime broker systems for client clearing, implementing STP software, or revamping SDPs, all dealers are dedicating valuable resources to new technology roll-outs, even in such capital constrained times. Regardless of the outcome of reform or the business model they're choosing, dealers know that only machines can deliver the costs efficiencies necessary for ensuring future profitability. Now is the time to invest.

There is a marked difference in dealer attitudes towards over-the-counter (OTC) regulatory reform in Europe compared to in the US. While the US is seeking to overlay a futures-style market on swaps trading, one that is a little more accommodating of its OTC trading heritage, Europe is seeking to impose an aggressively transparent equities-style market on all types of fixed-income trading, not just swaps, with little consideration for liquidity. Moreover, it appears to be moving away from a looser principles-based approach and closer to a stringent rules-based one.

Instead of collaborating with European regulators to see that the final outcome is workable, dealers are fighting the process even as they build out in preparation for the worst. They criticise the fundamental thinking behind reform; they say that the European scope is too broad; they lambast Basel III as a punitive marketplace killer. And they are lobbying, using whatever political chips they have in a last ditch attempt to salvage what they can of their existing business model.

Regulators are having none of it. They perceive vested interests and fear mongering. Indeed, relations between London and Brussels have deteriorated so much that trench warfare mentality has set in. Both sides are to blame for this unfortunate state of affairs. While regulators are insisting on the ultimate goal of a central limit order book (CLOB) for European fixed-income instruments, dealers are still arguing that their role as risk intermediaries is the only way to preserve a liquid market. Never the twain shall meet.

The next six to 12 months will be a critical period. Dealers can either use the time to educate regulators on the complexities of market structure and the methods they should employ to preserve liquidity in a new trading environment, or attempt to scupper the reform process. Hard-line negotiators will argue for the latter. The Eurozone is weak – now is the time to squeeze and not give away valuable concessions unnecessarily, goes the argument. Politics is just as fundamental to their strategy as adapting business models in anticipation of the worst. The danger in this approach is that the resolve of regulators will only harden. Should the Eurozone survive and they prevail, dealers may find themselves rushing back to a negotiating table only to discover that, by then, it's too late. As they focus on winning battles, there is a severe risk they will end up losing the war.

European Credit & Rates Dealers 2011: Capital, Clearing & Central Limit Order Books

European Credit & Rates Dealers 2011 results from conversations with two-dozen swaps dealers held in the late summer/early autumn of 2011. It investigates how dealers will find competitive advantage, their trading and clearing strategies, changes in client behaviour and views on how they will use technology to help define their value proposition going forward. Top-tier swaps dealers made up the largest segment of study participants, accounting for nearly 38% of respondents, with regional dealers and new entrants accounting for about a third, and mid-tier dealers over a quarter. 11 of the 14 G14 firms (who make up 46% of our study participants) participated, with nine being top-tier dealers and two being mid-tier. In terms of geography: 71% of participants were European firms, with a quarter being the European operations of North American dealers.

Tabb Group has released the survey results for the Fall 2011 SEF Industry Barometer. Results are based on responses from over 200 market participants including major dealers, interdealer brokers, SEFs, exchanges, asset managers, hedge funds, proprietary trading firms, clearinghouses, regulators, end users and others. TABB Group Director of Fixed Income Research Kevin McPartland provides analysis alongside the data, discussing the industry's views and what that will ultimately mean for the swaps market.

Executive Summary

It is over 3 years since the Lehman Bankruptcy and over a year since the Dodd-Frank Act was made law and yet we still have little clarity as to how the swaps market will function going forward. That hasn't stopped the industry from innovating and creating new business models and technology to ensure liquidity in the swaps market remains despite regulatory uncertainty.

The TABB Group study "Swap Execution Facilities: An Industry Barometer" released in April 2011 provided a benchmark of industry reviews related to SEF regulations and the SEFs themselves. This study provides further clarity as to the industry's stance on the issues and outlines those SEFs that are expected to be successful in Credit, Energy, Equity, FX and Rate swap markets.

Read more at Tabb Forum

The wide-ranging questionnaire seeks views on the scope of the legislation, proposals on the organisation of markets on trading, corporate governance, transparency and investor protection as well as the role of the European Supervisory Authorities.

Download the full survey from the European Parliament website

Financial News: European Parliament Launches MiFID Consultation

The European Parliament has called for industry feedback on the European Union's review of the Market in Financial Instruments Directive, in a development that will open-up the wide-reaching text to a further round of lobbying and further delay the final implementation of the rules.

Markus Ferber, a member of the German centre-right European People's Party, invited industry stakeholders yesterday afternoon to respond to a six-page questionnaire on the Mifid legislative proposal that was published by the European Commission in October.

Read more at Financial News (subscription required)

MarketAxess Holdings Inc. (Nasdaq: MKTX), the operator of a leading electronic trading platform for U.S. and European high-grade corporate bonds, emerging markets bonds and other types of fixed-income securities, comments on the European Commission's Markets in Financial Instruments Directive and Regulation (MiFID II and MiFIR).

The MiFID II and MiFIR proposals were published on October 20, 2011 and will now be reviewed by the European Parliament and Council. MarketAxess' comments and concerns regarding the proposals are summarized below.

Pre-trade transparency requirements must be commensurate with the characteristics of each asset class under regulation.

• An overly prescriptive regime requiring publication of pre-trade data in a continuous manner would not provide meaningful additional price discovery.
• Pre-trade transparency requirements should be tailored to the liquidity of individual instruments.
• There are 23,000 'tradable' European corporate bond instruments on MarketAxess.
• The number of individual stocks listed on the largest European stock exchanges is only: 2613 (LSE), 1000 (Euronext) and 6800 (Frankfurt).
• Corporate bonds trade much less frequently than other asset classes, such as equities:

• MarketAxess Click-to-Trade (CTT) trading protocol today provides live, executable markets for a broad range of corporate bonds and CDS.
• Extensive pre-trade pricing data is available from MarketAxess Bondticker™.

A consolidated tape operated by one or more commercial entities must be appropriately monitored and regulated in order to ensure data is available on a non-discriminatory basis.

• MarketAxess supports the introduction of a consolidated tape to increase post-trade transparency.
• A mechanism needs to be included that prevents trades that might have market impact from being immediately disseminated with full trade details. (e.g., FINRA's TRACE does not report size for high-grade corporate bonds over $5 million)
• In less liquid markets, timely post-trade data is the foundation for price transparency.
• Inherent conflicts of interest exist where consolidated tape providers are market makers or operate a trading venue.

Divergent market structures standards for derivatives trading between Europe and the US would create opportunities for regulatory arbitrage.

• Clarification is required on the likely differences between MTFs and OTFs in Europe, and SEFs in U.S. under Dodd-Frank.
• Clarification is required on the likelihood of voice brokerage being included under the OTF definition.
• We believe that investors obtain a better price of execution when multiple dealers are put in competition.
• MarketAxess data shows that in US high grade bonds, for every additional dealer response to an inquiry, the marginal cost saving is 0.3 basis points in yield.

Regulation of trading venues should allow for investor choice in trading protocols.

• In less liquid markets, request-for-quote (RFQ) provides the most competitive pricing.
• The majority of the CDS market today is not large or liquid enough to support central limit order book trading.
• Platforms like MarketAxess are today offering continuous, streaming markets for the most liquid CDS indices.

Even the most liquid iTraxx CDS indices trade, at their most active, fewer than 700 contracts per day, globally.

Given the number of leaks ahead of the "official" unveiling of the European Union's new MiFID proposal, there appear to be few surprises. But the new regulation will cover a great deal more than merely updating MiFID 1, especially in relation to broker crossing networks, algorithmic trading and high frequency trading.

While the original directive came into force in 2008 and broke the grip of national exchanges, the ensuing raft of unintended consequences compounded by the post-Lehman global financial crisis have forced a ream of new proposals designed to increase transparency and support global financial markets in the current technological age.

As the EU commission itself stated in its Oct. 20 news release, it is "true that the directive has not entirely delivered on its objectives". To which we would add….yet.

Read more on TABB Forum (free registration required)

Leading industry groups have warned that a revamp of European market rules overreach G20 principles and will backfire by hurting financial institutions and consumers. Both the International Swaps and Derivatives Association and Association for Financial Markets in Europe said on Thursday that they support EU efforts to enhance market transparency. However the bodies claim the European Commission's revised Markets in Financial Instruments Directive regime, trumpeted by EU internal market commissioner Michel Barnier earlier in the day, goes too far.

Read more at GFS News

Reuters: EU to fire starting gun on markets reform battle

Draft European Union securities reforms due on Thursday will fire the starting gun on a long battle over where to draw the line between curbs and competition in trading for banks, exchanges and investors. The Markets in Financial Instruments Directive or MiFID was introduced four years ago and spawned fierce competition in share trading to cut fees but split markets. The EU's executive will propose "MiFID II" to extend the law to commodities and bond trading, push derivatives onto trading platforms and make competition possible in clearing.

Read more on Reuters

As the October rulemaking deadline for MiFID II approaches, MarketAxess has summarized its views on the core proposals outlined in the rules.

MarketAxess believes that:

• the introduction of a consolidated trade tape for the European over-the-counter markets would enhance price transparency and facilitate measurement of best execution;
• multi-dealer electronic trading venues can improve market efficiency through enhanced transparency and increased competition.

We have concerns that:

• a prescriptive pre-trade transparency regime in OTC markets would not provide any meaningful additional price transparency;
• a consolidated tape run by a single or competing entity could lead to conflicts of interest; and
• divergent regulatory standards for derivatives trading between Europe and the US would be harmful to investors.

Click here for the full document.

Welcome to the new MarketAxess CDS Reform webpage. As an industry, we are steadily improving our understanding of the likely implications of the sweeping regulatory changes taking place in the global OTC derivatives markets, however much uncertainty remains. To help the CDS trading community understand what the changes might mean for these markets, we will be offering regular insights and perspectives as MarketAxess continues to engage with regulators, clients and other market participants globally.

In addition to providing unique views on this market, we will also soon be launching a CDS Toolbox for professionals - an online resource providing support, data and tools for CDS traders. Please contact us if you are interested in learning more about the Toolbox and we can ensure you receive further information as soon as it is available.

We hope you will find this site helpful during this historic and ongoing transition to CDS electronic trading and centralized clearing.