DE Shaw rebukes Giancarlo’s big idea on Sefs

Hedge fund endorses electronic trading, as CFTC pushes for a return to old phone-based business

The CFTC proposed new rules for Sef trading in November

The multi-billion dollar investment firm DE Shaw gave a thumping endorsement of the electronic trading mandated by current rules on swaps trading in the US, adding that the Commodity Futures Trading Commission’s new proposals for swap execution facilities (Sefs) would be a step backwards.

“The CFTC dragged us kicking and screaming into the twenty-first century,” said Darcy Bradbury, Shaw’s managing director for external affairs, referring to the last administration’s push for electronic swaps trading. The current rules “have had very demonstrable benefits for investors, whether it be better liquidity, streaming prices, tighter bid/ask – it’s been good for the market,” she said.

Outgoing CFTC chairman Christopher Giancarlo wants to overhaul the existing regime, which he sees as too restrictive.  

Bradbury spoke today (February 27) at the DerivCon conference in New York.

Shaw’s traders “love” request-for-quote (RFQ) to no less than three counterparties, she said. The RFQ is one of two modes of execution allowed under the current rules; previously the business was largely relationship-based – telephone calls, at times lubricated by wining and dining.

“No offence to a lot of people in this room, but do we really want to talk to brokers all day long, calling around trying to get quotes? No! You want to poke the button! It’s like your smartphone, right?” said Bradbury, who is also an International Swaps and Derivatives Association board member.

The current trading regime has also helped the hedge fund expand its counterparty list, said Bradbury. Speaking on the same panel, Michael Otten, executive director in the global markets legal group at Nomura Americas, could not agree more.

Those rules, he said, “have allowed us to compete for Darcy’s business and for other business”.

Bradbury cited a Bank of England study last year that detailed how the advent of Sef trading in October 2013 has seen “significant improvements in liquidity”, particularly for US dollar swaps, which saw liquidity improve by 12–19% since going electronic.

Bradbury’s comments chime with those of numerous large asset managers, including BlackRock, which have criticised the move to ‘expand’ the methods of trading swaps beyond just RFQ and a central limit order book.

Also speaking at today’s event, Brian Quintenz, a Trump-appointed commissioner at the CFTC, put the agency’s argument across. Current rules are too rigid, and liquidity could be improved by relaxing them, he said.

“By dictating how required transactions are executed, the current regime forecloses any number of alternatives that could create liquidity on-Sef and better address the highly variable, bespoke nature of many swaps,” Quintenz said in a speech at the conference.

Giancarlo has long argued that the Commodity Exchange Act dictates that swaps can be executed by “any means of interstate commerce”, and that allowing a variety of execution methods – essentially the phone, as opposed to exclusively screen-based trading – more closely follows what Congress intended when passing the Dodd-Frank Act in 2010.

Not everyone agrees. Darren Littlejohn, a partner at the Fried, Frank, Harris, Shriver & Jacobson law firm, said the legal text should not necessarily be interpreted as meaning the industry can execute in any way it pleases.  

“There’s flexibility in the statutory language, but I’m not necessarily convinced that we should read the statute to mean that any means of execution is permissible,” he said. “As we work through what the implications are of expanding it to that wide parameter, are we being faithful to those other objectives for the overall regime?”

Whatever emerges from the final CFTC proposal, the idea of “flexible” trade execution still has fans, Nomura among them, along with TP Icap, an interdealer broker which has long had voice brokers and is a central part of the business.  

“I think it’s better, the flexibility is great,” said Christopher Koppenheffer, chief operating officer for TP Icap’s Sef business. “It just makes it easier to operate your business from an operational and surveillance standpoint.”

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