New Trading Venues Line Up to Compete for Derivatives Business

By Jamila Trindle


WASHINGTON–Trading platforms competing for business in newly-regulated derivatives markets could get off to a rocky start next week.

As they jockey for position at the starting line, the new platforms face a raft of challenges in addition to competition amongst themselves, including regulatory hurdles and gripes from customers getting used to a new system.

New rules set to take effect Oct. 2 are aimed at forcing complex derivatives called swaps onto open trading platforms, but some firms that use swaps, to hedge risk or make bets on everything from interest rates to raw material costs, say the new system’s not ready.

William Thum, principal at The Vanguard Group, says market participants haven’t had enough time to “assess the pros and cons of each platform and to make a knowing selection of the preferred approach.” He supports the Securities Industry and Financial Markets Association request for a six-month delay.

Swaps were targeted by lawmakers after they contributed to the 2008 financial crisis. The CFTC then wrote rules to push the privately-negotiated transactions into open, competitive trading venues.

Some swaps are already traded electronically, but as of Wednesday they will have to be traded on newly regulated swap execution facilities or SEFs. If the platforms aren’t ready, some market participants say traders will go back to negotiating their deals privately.

“We could very well get to next week and see that no one wants to trade on a SEF,” said Rick McVey, CEO of MarketAxess Holdings Inc.

Firms that already run electronic trading platforms like MarketAxess and Bloomberg LP have registered with the CFTC to be SEFs as well as brokers that currently operate in the swaps market like GFI Group Inc.GFIG -1.99% and futures exchanges likeIntercontinentalExchange Inc.ICE +0.57% Newly formed start-up companies like trueEX Group LLC and Javelin Capital Markets LLC have also registered.

A CFTC official said earlier this month that the agency was registering platforms that submit applications, but wasn’t inspecting each one before it goes live.

David Van Wagner, chief counsel to the agency’s Division of Market Oversight, said officials “review the application essentially for completeness.”

“We do not do any sort of drill down on substance,” Mr. Van Wagner said at a meeting of the CFTC’s Technology Advisory Meeting on Sept. 12.

A spokesman for the CFTC declined to comment. The commission could issue some further guidance or last minute clarification as it has often done ahead of regulatory deadlines in the past.

“It’s a watershed time for changes in competition in the derivatives markets,” said Darrell Duffie, a finance professor at Stanford University. He said it may take a long time to know what “the new world of derivatives” will look like.

Some start-up trading venues don’t want a delay because they don’t want to lose ground to other competitors, including futures exchanges, which are rolling out products designed to mimic swaps.

“To delay rules might create an unfair competitive advantage between old platforms that claim they’re not ready and new platforms that are ready to go Oct. 2,” James Cawley, chief executive of Javelin Capital Markets LLC.

Former CFTC chief economist Jeffrey Harris said a certain amount of upheaval is natural in a newly competitive market.

“What we’re bound to see in the longer term is dozens of these SEFs registering and over time either merging or just dropping by the wayside,” said Mr. Harris. “It’s kind of like watching an economic experiment play out in real time,” he said.