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?
# # #
Latest
ISDA Market Practice Note for the Rebasing of European Inflation Indices
ISDA Market Practice Note for Rebasing of the: FRC - Excluding Tobacco-Non-Revised Consumer Price Index EUR - Excluding Tobacco-Non-revised Consumer Price Index ITL - Inflation for Blue Collar Workers and Employees-Excluding Tobacco Consumer Price Index SEK – Non-revised Consumer Price...
Guidance for EU IM Model Application for ISDA SIMM®
EU financial and non-financial EU counterparties exchanging IM based on ISDA SIMM® should have already submitted an initial application for authorisation to their competent authority (CA), and ECB if applicable. If not, they should do so timely to ensure continued...
Joint Response on Stress Testing Framework
On February 23, ISDA, the Bank Policy Institute, the American Bankers Association, the Financial Services Forum, the Securities Industry and Financial Markets Association and the US Chamber of Commerce jointly responded to the US Federal Reserve’s consultation on the stress...
Joint Letter on Italian 2026 Budget Law
On February 23, ISDA, the Association for Financial Markets in Europe and the International Securities Lending Association jointly sent a letter to the Italian tax authorities about changes to withholding tax on dividends made in the 2026 budget law, which...
