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23 November 2013

IFR: CFTC opens door to agency swaps model


Newly issued guidance from the CFTC has given the nod to an agency-style business model for dealers in OTC derivatives that will dramatically alter the way banks interact with clients and profit from swaps trading.

The Commission has been ushering OTC swaps closer to a futures market structure for some time, but a clarification regarding impartial access to swap execution facilities added momentum behind the shift. Under the new model, dealers will charge clients to access interdealer liquidity rather than reap profits from a principal-based model.

“There’s no question the CFTC is allowing the agency execution model in the swaps space", said Graham Harper, partner at lobbying firm Delta Strategy Group. “Market participants can access aggregate SEF liquidity through an intermediary, much like many do in futures and equities, without connecting directly to SEFs.” SEF operators must provide access to all swaps users, the CFTC ruled, after it emerged that multiple platforms have been imposing limits that kept non-dealer firms out of specific liquidity pools.

The agency execution framework is likely to relieve a huge burden for buyside firms struggling to get up to speed with SEF compliance, as it will allow firms to link up to a dealer that can then connect to several SEFs on their behalf. Banks that have so far shunned the move towards agency are likely to lament the move, suggest market participants. The evaporation of exclusivity means dealers will lose the information advantage that facilitated profiting from a principal-based trading model. Swaps users are expected to be mandated to trade standardised interest rate and credit default swaps on SEFs starting mid-February.

Full article



© International Finance Review


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