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News: Streetwise Professor » I Was Wrong. But Not as Wrong as What I Was Wrong About.

26 May 2013 | Bill Hodgson

SWP points out the worst of Dodd Frank (in his opinion), the Made Available to Trade rule (MAT). Have a read of his post, then think about some scenarios this could cause:

  • First SEF to launch covers a wide range of products - suddenly  other SEFs are forced to support the same set of products
  • A group of SEFs meet privately and agree to limit the scope of products Made Available to Trade, so as to keep costs and complexity down
  • Chaos ensues where every SEF is in a free-for-all to launch products in their specialised markets - but due to MAT, they have to also include any product from any other SEF, causing an endless cycle of upgrades
  • Software vendors & the SEF users in a nightmare upgrade scenario, adding product support on a daily basis

Surely allowing SEFs to specialise and launch products adhoc without causing every other SEF to support the same products is a common sense approach, which we can see now. What's the view from the Front Office? Anyone know? Streetwise Professor » I Was Wrong. But Not as Wrong as What I Was Wrong About..


Comments

Entertaining and interesting as ever. The professor explores some of the chicanes the SEF rules take you down.The fundamental point at the heart of this is whether mandating OTC trades a. to clear and b. to trade on SEFs was a good idea from a big picture perspective. Why wouldn't it be? Well, the clearing mandate on new trades inhibits risk reduction trades against existing bilateral counterparties thus entrenching pre-existing bilateral risk whilst mitigating only new risk. And SEFs would be the first time in history that regulators tried to force trading onto an exchange-type platform (previously they all happened by exchanges starting up and liquidity arriving of its own accord whilst having reasonable ways to execute the same risk off exchange (e.g. OTC forwards instead of futures). All of the other oddities stem from these two points - directly or indirectly. I plan to do a blog post on this topic sometime soon.However, if you ignore the above fundamental discussion and look to practicalities:- available to trade is the least bad option (e.g. imagine if CFTC were to have the decision directly of what specific products should trade on a SEF...)- though there could be some silly possibilities it feels like SEFs will be guided by participant input (both sell and buy side) even when they are not part owned by sell side firms- no SEF will want the reputation of making things difficult for both sell and buy side by pushing SEF execution of the most awkward product within the clearable scope e.g. something like amortizing swapsSo they'll probably start with the vanilla stuff and are all likely to start with similar or the same products. Also in the vanilla rates OTC space you already have some "natural causes" ECN liquidity on TradeWeb and Bloomberg alongside government bond trading on those platforms (bigger).Also sell side firms may be looking past the mandate and actually want to have SEFs succeed given:- flexibility of clearing at both SwapClear / CME in the US (where all swapfutures exchanges clear at CME only so less flexibility on offsetting existing cleared risk)- some are specifically geared towards D2D trading (e.g. iSwaps)- some are geared towards CCP spread trading (e.g. Trad-x)What is interesting in particular is how / whether the SEFs embrace the MacIRS proposed standard swap terms in quarter point fixed rate increments.

Reblogged this on Carl A R Weir's Blog and commented: Very interesting read....