Just one week ahead of the mandate for trading benchmark interest rate swaps on swap execution facilities, several platforms are still making last-minute changes to legal documents to ensure impartial access to liquidity. The changes are being enacted almost three months after a key regulator highlighted the issue.
Buyside traders are complaining that SEF rulebooks still contain caveats that preclude access to all participants, whether clients are connecting directly or through an agency model. In January, the Managed Funds Association wrote a letter to the CFTC voicing the concerns.
“MFA’s members have encountered material issues related to SEF rulebooks … that represent significant barriers to impartial access for buyside firms to SEFs,” wrote Stuart Kaswell, general counsel at the Association.
“Although MFA members, as individual buyside participants, have raised these concerns directly with SEFs, MFA strongly believes the Commission’s intervention is crucial to enforce a baseline of compliance across all trading platforms.”
Impartial access has been a hotly contested issue since November when then CFTC chairman Gary Gensler voiced concerns that Bloomberg, Tradeweb, and MarketAxess were not in compliance with the provision.
Market participants have worried that commercial models at some platforms may lead to partitioned liquidity pools reserved for specific clients.
“For competitive reasons certain SEFs have tried to segment the market,” said the head of one competing platform. “The commercial models they employ dictate they are less willing to allow open aggregated access to their platforms.”
But the platforms say the changes are merely growing pains for a newly created market working on an accelerated timeline. For one, impartial access is nowhere near the only contentious issue related to SEF rulebooks. (”Asset managers rail against SEF rulebooks”.)
The state of negotiations has meant that some platforms are just now getting around to satisfying buyside concerns. Tradeweb, for example, published a new rulebook on January 31 clarifying that clients would be allowed to access its liquidity through an agency execution model or third-party aggregator.
“Our initial thought on all of this was let’s first try to connect directly to customers and then over time we’ll see if there is enough demand for agency access to the platform,” said Lee Olesky, CEO at Tradeweb.
“Once we determined there was interest, we made changes to the rulebooks. But we’ve had to make changes several times for several different reasons since launching in October, as have others. This will probably be a continuing process in terms of getting clarity from the CFTC, and specificity from the marketplace about how we need to move on.”
Buyside traders said the revamped rulebook satisfied their access concerns. But communication between other platforms and buyside members on the issue has turned stale in some cases.
GFI Group, for example, was cited by one fund lawyer as impeding access by requiring funds to have a blanket guarantee of their credit lines by their bank futures commission merchants. The funds said that no FCM would ever provide such a guarantee.
However, some market participants said the firm would allow FCMs to check each fund’s credit on a trade-by-trade basis subject to the requisite connectivity.
“We are fully compliant with CFTC guidelines,” said a GFI spokesperson.
The misunderstanding, though, highlights the high traffic and dense nature of negotiations.
The firm has not yet signed up any buyside participants, though it is facilitating agency execution through UBS, Credit Suisse, and two other unnamed firms.
The rulebooks are massive undertakings – Tradeweb’s latest iteration is 77 pages long – meaning issues are bound to continue bubbling to the surface over the next several months. As a result, buyside participants are pining for clarity from the CFTC to expedite the process.
Eventually, they will get it. The approval of SEF platform registrations in October was only temporary and based on a “completeness review”. Full registration will be based on full compliance to be reviewed at a later, unspecified date by the agency, which should come as a relief for buysiders still worried they are signing faulty legal agreements.
“Our concern is that we are in dialogue with the platforms in trying to come up with new language, but the dealers are standing over their shoulder trying to influence how the rulebooks are written,” said the fund lawyer.