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Global Regulators Ponder OTC Derivatives Clearing Houses; Regulators in the U.S

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Global Regulators Ponder OTC Derivatives Clearing Houses; Regulators in the U.S Q4 2010 Intelligence for the Investment Community Published by IN THIS ISSUE Page 2 Tradeweb’s CEO and President provide their insight on important industry topics. Page 3 Key develop- ments related to OTC Derivatives Reform: Tradeweb links to major Global Regulators Ponder OTC Derivatives clearing houses; Regulators in the U.S. and Europe are creating a roadmap for over- and DerivAlert. the-counter derivatives that will transform the structure of the market. The Dodd–Frank Wall Street Page 4 Officials are in active consultation with the industry over transparency, Reform and Consumer Pro- Read about trading and clearing arrangements. It is expected that most of the market tection Act contains many integration, as will move towards regulated electronic platforms. provisions that will affect the well as new Concern over potential regulatory arbitrage is likely to result in a high OTC derivatives industry. enhancements to Tradeweb’s degree of harmonization of rules. The timing of full implementation re- • The bill mandates that any electronic mains unclear, and indeed there may “clearable” swaps be cleared platforms. “Electronic swaps trading be “technical adjustments” resulting through a regulated cen- provides a greater degree tral clearing facility, which Page 5 from the recent change in control of Current trends of price transparency and will drive a large number the House. Regulators on both sides impacting is more efficient than con- of the Atlantic are considering how of trades onto regulated Government ventional swap trading, far the industry will need to evolve to marketplaces (SEFs or DCMs) Bonds and the and create transparency in demand for consequently reducing risk satisfy the needs of what inevitably for the participating par- the derivatives market. This market data will be a more rigorous set of rules. across industry ties. For these reasons we will also require that swap Buy-side and sell-side firms are as- traders form links to clearing sectors. expect it to become the sessing the U.S. legislation and which houses. universally accepted way Pages 6-7 steps they will need to take to trade A view on Many derivatives will need of trading swaps in the electronically, if they are not already. • the relevant near future.” Trading of many derivatives in to be traded through either market issues swap execution facilities the U.S. will now need to take place and their effect Chris Skelton, Director of Dealing (SEFs) or regulated exchang- on Tradeweb’s either on a swap execution facility Legal & General Investment es, which will encourage key fixed-income Management Limited, London (“SEF”) or a designated contract mar- competition in the market platforms. ket (“DCM”). SEFs are alternatives as these trading facilities to an exchange-type model and are potentially much less disruptive to the Page 8 and organizations file with A picture’s interest rate swap marketplace, in particular. regulators. worth a thousand The specific definitions of SEFs and the core principles that support words. Charts and • The bill also calls for report- them are less clear, but with current growth rates, and the added push data illustrate ing of swaps transactions, from legislation, it is expected that the majority of interest rate swap trad- key market which should drive further movements ing will take place electronically. transparency in the market- and direction. Tradeweb expects to become a SEF when it is time to register, and place. become a leading solution for the electronic trading of derivatives. InSights The Path to Modernization Financial reform provides the foundation for a more trans- markets has never been greater and, as U.S. Supreme Court parent and efficient derivatives marketplace. While some Justice Brandeis once said, “sunshine is the best disinfec- questions remain unanswered, it is clear that the intention tant.” By introducing requirements for pre- and post-trade of global legislators is to drive most derivatives trading and transparency, the regulators will provide the opportunity processing to regulated, competitive electronic platforms. for a broader and more innovative derivatives market – one The spirit of This increased focus on e-trading of derivatives will con- that benefits from the protections that can provide technol- OTC derivatives tinue to transform a 30-year old marketplace, but it does ogy such as audit trails and real-time auctions. While the reform is to not signal the death of the over-the-counter model. introduction of electronic trading has increased the broad improve them The OTC markets balance the needs of liquidity makers availability of real-time pricing, OTC derivatives are still – not by closing and liquidity takers. The liquidity makers – primarily banks largely traded on the telephone, where pricing is more them down but – play an invaluable role in opening up access to credit opaque. Fortunately, electronic trading and processing are by introducing throughout the economic chain and enabling institutional making inroads, providing a path to a more efficient mar- safeguards. users to accurately manage their risk. Liquidity makers ketplace. This said, certain derivatives trades will continue perform this function by risking capital to execute a near- to require private negotiations between buyer and seller, infinite variety of trades with their clients to best manage which may be conducted electronically or through the their risk. This flexibility in deal structure is not suited to telephone and then executed on a SEF. an exchange-type trading model, but can be achieved with Ultimately, the success of the reform will be defined other types of electronic execution venues, some of which by the adoption of a structure for derivatives trading that have been in existence for ten years or more. encourages the use of competitive electronic markets, and The OTC derivatives markets provide many benefits does not restrict the role of dealers as liquidity makers nor but are by no means perfect; the spirit of reform is to replace them with an unworkable “exchange” model. The improve them – not by closing them down but by intro- stakes have never been higher for the derivatives market. ducing safeguards. Trading swaps electronically on “swap execution facilities” can provide market participants with the flexibility they require to manage risk transparently and efficiently in a way financial legislation rightly man- dates. It is now in the hands of the regulators to draw the lines in the sand which will determine how many of these benefits can be preserved in the new market structure. Lee Olesky The widespread demand for open and competitive Chief Executive Officer, Tradeweb A Voice for the Buy-side For all the discussion taking place around financial reform, provides a proven means to access liquidity while achieving it is increasingly clear that regulators would benefit from the goal of pre-trade transparency in a multi-dealer-to- more input from all facets of the derivatives market. So far, customer marketplace. It is increasingly it seems that the voice of the buy-side has been relatively Tradeweb will continue to meet with the regulators, clear that regu- unheard. Asset managers are well-positioned to express the and other parties to help shape the derivatives markets, but lators would value of the client-dealer relationship, and uniquely placed input from the buy-side is a key component in this process benefit from more input to articulate the negative impact an anonymous trading and needs to be heard. After all, these are the very institu- from all facets model could have on the liquidity of the swaps market. tions the new regulation is designed to protect. of the deriva- Tradeweb continues to support the goals of the Dodd- tives market. Frank Act, and its focus on increasing transparency and reducing systemic risk in the derivatives markets. However, we also understand that the buy-side has diverse business profiles to manage, requiring sophisticated risk manage- ment solutions to effectively hedge assets and/or liabilities. Billy Hult To this end, we believe the request-for-quote (RFQ) model President, Tradeweb 2 • Q4 2010 • emarkets NewsBeat Dealerweb Hits the Ground Running Tradeweb PLUS for It’s almost two years since Dealerweb sury Bills in 2010 was the fi rst hybrid IRS: Click-to-trade was launched as an inter-dealer platform Dealerweb market. It is also Dealerweb’s for TBA mortgage-backed securities. fi rst foray into the U.S. Treasury market Functionality Since then, the platform has established and extends its footprint in the U.S. Following its success in the European a permanent position in the marketplace Rates markets. Government Bond marketplace, Tradeweb and a reputation for providing fi rst-class Dealerweb was created to provide PLUS click-to-trade functionality has been technology to the Street. While quality electronic inter-dealer markets, follow- introduced globally for Euro-denominated of product and client service is key in ing the 2008 acquisition by Tradeweb interest rate swaps (IRS). Th is additional the IDB markets, the dual channels of Hilliard Farber & Co., Inc. Hilliard way to access liquidity complements the of voice and electronic execution are Farber is an inter-dealer voice broker existing auction-based protocol, allowing important ingredients for the future suc- specializing in Mortgage-backed securi- clients increased effi ciency around work- cess of the business. Th e launch of Trea- ties and U.S. Treasuries. fl ow, information, and execution. Tradeweb PLUS off ers clients the ability to see where liquidity is achievable, New Equity Options Platform without disclosing inquiry details. Tradeweb has launched a dealer-to- form’s fi rst eight weeks’ trading, and to Dealers display fi rm, streaming, customer Equity Derivatives platform date € 5 billion worth of equity options two-way prices that are live and execut- in response to demand from market have been traded. able across the interest rate curves.
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