CFTC Said to be Considering Reduction in 'Minimum of Five' for SEF Rules

Just weeks before swaps market participants are anticipating long-delayed SEF rules for swaps trading, news has emerged that regulators at the CFTC are considering modifying one of the cornerstones of the rules: the requirement that investors solicit a minimum of five quotes in order to transact.

A story in Friday’s Financial Times reports on a confidential CFTC memorandum, saying: 

Mark Wetjen, seen as the swing vote on the five-person Commodity Futures Trading Commission, recommended this week in a confidential agency memorandum that the CFTC alter its proposed rule regarding derivatives marketplaces, or “swap execution facilities”, according to people who have seen the document.

Mr Wetjen is proposing to abandon a proposal – which was vehemently opposed by the largest global banks – to require institutional investors to solicit prices, or “requests for quote”, from five dealers.

If this becomes a reality, it would be consistent with what Tradeweb wrote in a March 2011 comment letter to the CFTC:

While under certain limited circumstances it may be in the interest of a market participant to request a quote from a large number of recipients for certain trades, in most other instances, a market participant will not want to disclose its trading interest to a large segment of the market…Thus, our experience has been that flexibility is the key to maintaining liquid markets, and that setting a rigid floor could adversely impact liquidity and the market as a whole.

Of course, news reports of confidential memorandums and final rules are distinctly separate things. But it is constructive to see that this portion of the rule – which has long been seen as a significant structural issue by many observers – may get modified.