Earlier this week, the US CFTC approved rules governing the execution of swap transactions. Among the major issues was a proposal to require market participants to seek five price quotes on trades done on a swap execution facility. The Commission ultimately voted to mandate two “request for quotes” (RFQs), with the requirement eventually increasing to three.
The range of headlines (and stories) following the CFTC vote was interesting:
“US in Compromise on Derivatives Trade Rules” (Financial Times)
“Regulators Strike Compromise on New Derivatives Rules” (Wall Street Journal/Dow Jones)
“Big Banks Get Break in Rules to Limit Risks” (New York Times)
“Wall Street Wins Rollback in Dodd-Frank Swap-Trade Rules” (Bloomberg)
“CFTC adopts SEF rule, including RFQ3, voice broking” (Reuters)
Hmmmm. Was it a compromise, a rollback, a break or something else entirely? (It clearly was an adoption of a rule, as Reuters notes.)
Another point of interest: in at least some of the articles, there’s a presumption in favor of requiring five RFQs.
Why? How or why is it “good” to mandate that a derivatives user request a certain number of price quotes from different dealers? And why five?
Shouldn’t this be up to market participants to decide? Particularly since getting a quote is easy enough, given the different ways derivatives users can get or check prices (via phone, terminals, and dealer, broker and other trading systems)?
The flawed assumption is that the client is not qualified to decide for itself whether 2, 3 or 23 quotes are optimal. It also ignores the fact that information has value for the recipient of the quote requests and the client might not want to offer that information to any more counterparties than is appropriate to the situation.
There’s something else that’s interesting: it’s the presumption that these trade execution rules have anything to do with reducing risks in the financial system. Trade execution is about market structure – not systemic risk. If the goal of financial regulatory reform is to reduce systemic risk, shouldn’t we focus on issues that affect it, like regulatory capital, clearing, margining and regulatory transparency?
Shouldn’t we also avoid mandating “more” to customers when it really means less, and just leave it to them to decide how much is enough?
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