In what looks like a case of crossed wires, the Commodity Futures Trading Commission (CFTC) told European trading platforms not to apply for its new, harmonised regulatory treatment – pending a revamp of the framework – even as the UK's Financial Conduct Authority (FCA) was working through the rules with London-based venues, according to industry sources.
As Risk reported yesterday, none of Europe's swap trading venues has applied to the CFTC for qualifying multilateral trading facility (QMTF) status, a designation unveiled by the CFTC in February as part of an accord with the European Commission. QMTFs would be open to US persons – market participants that are subject to US rules and would otherwise be allowed only to trade on US-regulated swap execution facilities (Sefs).
"No MTF has taken the CFTC up on this offer because we were effectively told not to by the commission. One of the big five interdealer broker MTFs was willing to make an attempt for QMTF status but that platform was told to hold off by the CFTC because it was planning to issue reworked guidance, clarifying what the commission was looking to achieve," says a source at one New York-based interdealer broker.
CFTC commissioner Scott O'Malia, who recently told Risk that the blame for any split in US and non-US swap liquidity should be laid at the feet of regulators, confirms the agency put would-be applicants on hold. "I am told our staff had told firms to wait for additional direction from the CFTC," he says in an emailed statement.
Sources at two other broker-run platforms say they were also told to wait for clarifications from the CFTC before applying for QMTF status.
Our staff had told firms to wait for additional direction from the CFTC
At the same time, the FCA was working through the QMTF framework with UK-based platforms, and some say it actively encouraged firms to sign up.
"The biggest proponents for signing up for this relief were the staff at the FCA, whereas the CFTC was telling people to not rush in with applications at that point. I'm not sure whether the FCA's intention was to co-ordinate the MTFs to sign up together but the London broker market received a lot of phone calls from the FCA encouraging them to seek QMTF status, although the FCA has absolutely no authority to compel any MTF to sign up for it," says a London-based broker.
The FCA declines to say whether it was encouraging London-based trading platforms to apply. "Beyond confirming that we work closely with the CFTC and European authorities, it's worth noting that the decision on whether to apply or not is one for individual platforms," a spokesperson says via email.
Parties with knowledge of the discussions say the FCA contacted MTFs to invite them to jointly work through the original February 11 no-action letter to come up with a common interpretation and approach.
"There were a number of conference calls with the FCA around trying to understand how these QMTFs would operate, what the basic principles were and what had been agreed, so it is understandable that no formal applications have been made. Our shop has let the CFTC know that we were following this and we have been waiting for further information from the CFTC on how a QMTF should look and operate," says a source at one London-based broker.
The CFTC's clarifications were published on April 9, but the consensus among European MTFs in both the interdealer and dealer-to-client markets is that few, if any, trading platforms will seek QMTF status.
US dealers have spent the past six months transferring their non-US swap books out of foreign branches and into non-guaranteed affiliates – which are not regarded as US persons under the CFTC's cross-border guidance – allowing those affiliates to continue trading with non-US customers without following US clearing or Sef-trading rules.
That obviates the need for European trading platforms to seek QMTF status, market participants say. The problem with the industry's workaround is the splitting of liquidity into two pools – with US persons trading on Sefs, while non-US persons trade bilaterally or on MTFs – but trading platforms argue the widespread uptake of QMTF status would not solve that issue, because non-US persons will still choose to avoid US persons until equivalent rules on clearing and execution come into force in their own jurisdictions. As such, the prospects for the new QMTF regulatory category appear grim.
The one exception could be the US dollar-denominated swap market, intermediaries say, since the huge global demand for US dollar liquidity could require the involvement of US dealer holding companies rather than just foreign affiliates.
"With the exception of one or two markets, I'm not sure any trading platforms will need QMTF status, since the US banks are now able to provide liquidity to non-US persons without moving into a CFTC-regulated environment. The only exception is in markets where a lot of the liquidity is very specifically coming from the parent companies of the US dealers, such as the US dollar swap markets. In markets like that there is a strong likelihood that the US banks will want to continue to provide liquidity from a US entity, but I think they would simply use an established Sef in the US," says the New York-based interdealer broker.
The week in Risk.net, February 10-16 2017Receive this by email