Swaps Platform Urges 'Better Than TRACE' Reporting Jumbo Trades

By Katy Burne

 

The founders of Javelin Capital Markets, an electronic trading venue for over-the-counter credit and interest rate derivatives, are pushing for real-time reporting of large trades that have the potential to move markets.

The founders of Javelin Capital Markets, an electronic trading venue for over-the-counter credit and interest rate derivatives, are pushing for real-time reporting of large trades that have the potential to move markets.

Reporting delays have been hotly debated because there is a tension between the need for price transparency alongside the need to give dealers who are quoting large trades sufficient time to get out of their positions or put hedges in place before trade details become the subject of public record.

Under the Dodd-Frank Act passed in July, large trades--called block trades-- have to be traded on exchanges or registered alternatives called swap execution facilities, or SEF, if they are sufficiently standardized. But they are allowed to be reported with a limited time delay that has yet to be determined by regulators.

In a letter on Wednesday to the Securities & Exchange Commission and the Commodity Futures Trading Commission, which have been charged with implementing the Act, Javelin recommends the delay for block trades be 10 minutes or less, and as soon as technologically practicable for regular-sized trades.

"Some have argued that such a time delay should be measured in days, weeks and even months," said James Cawley, chief executive of Javelin and founder of the Swaps and Derivatives Market Association. "We strongly believe that such a time delay should be objectively measured in minutes, if not milliseconds."

The SDMA represents the interests of small and medium-sized dealers looking to break into the derivatives market that is currently dominated by bulge-bracket Wall Street firms. It has sought to level the playing field on a variety of issues, including access to central clearing platforms.

In the bond market, a delay of 15 minutes is allowed on the Financial Industry Regulatory Authority's Trade Reporting and Compliance Engine. TRACE also allows for trade sizes to be masked if they are over $1 million.

"The statute requires reporting on price and volume," wrote Cawley in the letter. "Congress was aware of the TRACE system but chose real-time price reporting [for swaps]. The Commissions should not adopt the lower transparency standard of TRACE."

The block trade reporting exemption could provide some welcome flexibility for dealers, according to Kevin McPartland, senior research analyst at TABB Group. It "creates an environment where trades can still be executed bilaterally as long as they are ultimately reported to a SEF and the SEF reports that trade to the regulators after the decided time delay," he wrote in a soon-to-be-published research note.

How block trades should be defined is up to the SEC and CFTC. But it won't be easy. Standard trade sizes vary by asset class--from around $5 million in credit derivatives to as much as $100 million for interest rate derivatives--and block trades are many multiples of that.

The Technical Committee of the International Organization of Securities Commissions has been charged with producing a report about electronic execution and best practices in trade reporting by Jan. 31.

http://online.wsj.com/.../BT-CO-20101020-717252.html