Much Ado about RFQ

I should probably start with an apology for bombarding regular readers of Sell-Side Technology and this Editor's Letter with SEF-related coverage lately. This will be the last one for a while. Probably. But given the events of last week it's an interesting and important topic area to discuss.

As we all know, the US Commodity Futures Trading Commission (CFTC) passed a number of final rules on Thursday relating to the operation of SEFs, and the products that they'll be able to offer, along with specifications about how they'll interact with the market. The biggest bone of contention has been the request-for-quote (RFQ) protocol issue, which was initially going to force participants to put out five RFQs, but ended up being two in the final text, automatically increasing to three after a year.

Responses to this, from people I've spoken to across the industry, vary wildly. One interdealer broker questioned, in strong terms, why RFQ provisions were even in the rules to begin with ─ Dodd-Frank, they argued, said that SEFs have to provide the ability to send out RFQs, but did not mandate that they had to be put in place. Some SEFs, like FXall, said that the reduction to two RFQs was welcome, but that it was a shame Commissioner Scott O'Malia's amendment to the proposal was rejected. That would have forced the CFTC to review data regarding liquid and illiquid instruments using RFQ models before the automatic rise to three engages, and take a decision based on it as to whether they should stay at two or three. Still more, like one consultant, asked if it was really an issue in the first place.

It could end up being pointless, anyway. One of the key messages from the entire public meeting (and, I have to say, kudos to the CFTC for making it public) was that US rules have to be interoperable with European rules, with Chairman Gensler describing the platforms as international in nature. When Europe finally puts its house in order ─ and it could be three or four years before we see the Organized Trading Facility (OTF), its SEF equivalent, emerge ─ the CFTC will revisit its own rules, and possible do away with RFQ altogether if the EU doesn't force minimum requirements.

E-Voice
I don't trade, and I don't have the answers. But, it seems, a compromise is better than none on the issue. Of more interest was the allowance of voice as an execution method, leading that same consultant to posit that e-voice ─ the amalgamation of electronic trading and traditional telephone negotiation ─ is the eventual form that the market will take. That is, it'll be neither entirely opaque, bilateral over-the-counter (OTC) trading, nor fully electronic. Elements of both will remain, which will help with the business models of some firms.

When Europe finally puts its house in order ─ and it could be three or four years before we see the Organized Trading Facility (OTF), its SEF equivalent, emerge ─ the CFTC will revisit its own rules, and possible do away with RFQ altogether if the EU doesn't force minimum requirements.

All agree, however, that Thursday was a landmark in the history of capital-markets trading for these instrument types. The Securities Industry and Financial Markets Association (Sifma) released a blistering initial retort to the rules, but whether you're for or against, or somewhere in between, this will radically change the face of how swaps are traded. With around four months to general compliance, the race to ready is certainly on.

If you'd like to discuss the rules, their effect on the market, on SEFs and other areas then please do get in touch. I can be reached on james.rundle@incisivemedia.com or by telephone at 0207 316 9811. Or, practice your e-voice skills and use both.

Finally, although this is the sell-side aspect of Waters, I'm hoping to see a few of you tomorrow at the Buy-Side Technology European Summit in London. Please say hello if you're there on the day.