On Your Mark, Get Set ... Just Kidding

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Rob Daly, Sell-Side Technology

A panelist at a recent foreign exchange (FX) conference said that the evolution of FX marketplace is not a race to the bottom. But at the same event, I spoke to an official from a major multi-dealer platform, who wondered what really separates multi-dealer offerings these days.

Over-the-counter (OTC) trading is entering its next major evolutionary phase, thanks to the Dodd–Frank Act in the US, and the review of the Markets in Financial Instruments Directive (Mifid II) in Europe, but there are usually two ways to go when it comes to electronic trading: Either it is a race to the bottom, where broker-dealers offer the best priced low-touch access to the market; or the exact opposite, which involves establishing a high-touch relationship with clients.

With OTC trading, it’s usually the latter, given the bespoke nature of the products. But as swap execution facilities (SEFs) trading centrally cleared products are introduced, this will change, and it will become a race to the bottom.

Over the next few years, the market infrastructure will develop. It won’t be a greenfield implementation, since most of the links between dealers and prospective SEF operators, clearinghouses and trade repositories already exist. It is only a matter of testing the trading platforms and configuring the back-office connections. That is an extreme over-simplification, but it should be a straightforward project for SEF-traded instruments once the OTC trading community has clear guidance from the regulators about the new rules.

That's the rub: The US Commodity Futures Trading Commission (CFTC) already kicked the can down the road when it put in a "temporary" measure to extend Dodd–Frank rulemaking until December 31. Everyone knew this extension was coming, given the regulator's near-perfect track record of missing rule-creation deadlines throughout the first half of this year.

I know some major dealers are hoping that with an extension, cooler heads will prevail, since Dodd–Frank was conceived and enacted on the heels of the 2008 credit crisis. The likelihood of this is lessened, however, since the new rules are set to take effect in the months leading up to the 2012 US presidential election, when the national debate is sure to be anything but calm and reasoned. Securing guidance from the regulators during this period will get harder, not easier.

Eventually, firms will need to lace up their cleats for the coming race to the bottom. But for now, the racers haven't left the house to head to the track.

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