CFTC Roundtable on Package Transactions
At
a Commodity Futures Trading Commission (CFTC) Roundtable on February 12,
regulators and industry participants discussed trade execution mandates,
specifically as they apply to so-called “package transactions.”
Opening
Remarks
CFTC
Commissioner Scott O’Malia set the stage for the roundtable saying the CFTC
hosted the event to get more insight on the different kinds of package
transactions and how the Commission should go about addressing technological,
operational, and jurisdictional issues as they relate to these products. He
noted that the CFTC provided temporary no-action relief for 90 days, until May
15, 2014, until these products need to be in compliance with trade execution
mandates.
CFTC
staff noted that all transactions which are subject to the trade execution
requirement must be traded on a swap execution facility (SEF) or a designated
contract market (DCM) in accordance with CFTC rules, and that having a
multi-leg transaction does not relieve the trade from this SEF trading
obligation.
Open
Discussion
Roundtable
participants explained that package transactions consist of two or more
instruments that are executed simultaneously at a package price. They
noted that most problems arise because one of the instruments in the package is
subject to the made available-to trade (MAT) requirements of the CFTC while the
other is not.
They
noted that the swap spread price is contingent on the fact that it is a package
transaction and that if the swaps went through as individual transactions,
there would be higher costs associated with the trade.
CFTC
staff asked what percentage of the overall market these package transactions
represent. There was some disagreement on this percentage from the group. One
member said the proportion is around 60 percent, due to the fact that package
transactions make up a large percentage of interdealer market activity, while
another member representing a SEF said that interest rate swaps (IRS) and
credit default swaps (CDS) done as packages represent less than five percent of
trading activity on his platform.
The
panel said that the problem with package transactions in the market right now
is that there is no way of consistently tagging the different legs of a trade
as being part of a package. This becomes problematic when credit limits are
determined on a pre-trade basis, a panelist explained, as the overall risk of a
package is lower than the risk of its parts. Since the operations systems in
place in the market can only see the package one item at a time, she explained,
the trade may exceed a counterparty’s credit risk limit and be rejected.
There
was overall agreement that a system to assess packages as one unit is not yet
in place, but must be in order to ensure efficient market functioning during
the transition to SEF trading under the trade execution requirement.
The
panel explained that the problem lies in the execution phase of the process
rather than clearing stage as the requirement to trade in a central order book
or through a request for quote (RFQ) system creates risk that one party will be
unhedged if the transaction does not go through as a package.
A
futures commission merchant (FCM) representative stated that, currently, a
client will send in a trade on a leg-by-leg basis and if they hit their credit
limit, they can resubmit their order. She noted that the only way to accommodate
package transactions in the current system would be to increase credit limits,
but worried about the additional risk exposure that this situation creates.
There
was general consensus that a consistent and standardized ecosystem and common
language or protocol would need to be adopted by the entire industry in order
to address the problems currently faced when dealing with package
transactions. It was noted that the developers of the coding language
used in these transactions will be coming out with a new product in June or
July that will enable the industry to tag their trades with a marker that shows
each leg as being part of a package.
When
discussion focused on the timeframe for the industry to get these systems up
and running, participants said they were thankful for the 90 day no action
relief for compliance but that it may end up taking closer to 120 days to have
the entire industry set up with the proper technical and operational systems.
For
more information on this roundtable, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Derivatives,Hearing Summaries Agency:CFTC,Publish Year:2014
At
a Commodity Futures Trading Commission (CFTC) Roundtable on February 12,
regulators and industry participants discussed trade execution mandates,
specifically as they apply to so-called “package transactions.”
Opening
Remarks
CFTC
Commissioner Scott O’Malia set the stage for the roundtable saying the CFTC
hosted the event to get more insight on the different kinds of package
transactions and how the Commission should go about addressing technological,
operational, and jurisdictional issues as they relate to these products. He
noted that the CFTC provided temporary no-action relief for 90 days, until May
15, 2014, until these products need to be in compliance with trade execution
mandates.
CFTC
staff noted that all transactions which are subject to the trade execution
requirement must be traded on a swap execution facility (SEF) or a designated
contract market (DCM) in accordance with CFTC rules, and that having a
multi-leg transaction does not relieve the trade from this SEF trading
obligation.
Open
Discussion
Roundtable
participants explained that package transactions consist of two or more
instruments that are executed simultaneously at a package price. They
noted that most problems arise because one of the instruments in the package is
subject to the made available-to trade (MAT) requirements of the CFTC while the
other is not.
They
noted that the swap spread price is contingent on the fact that it is a package
transaction and that if the swaps went through as individual transactions,
there would be higher costs associated with the trade.
CFTC
staff asked what percentage of the overall market these package transactions
represent. There was some disagreement on this percentage from the group. One
member said the proportion is around 60 percent, due to the fact that package
transactions make up a large percentage of interdealer market activity, while
another member representing a SEF said that interest rate swaps (IRS) and
credit default swaps (CDS) done as packages represent less than five percent of
trading activity on his platform.
The
panel said that the problem with package transactions in the market right now
is that there is no way of consistently tagging the different legs of a trade
as being part of a package. This becomes problematic when credit limits are
determined on a pre-trade basis, a panelist explained, as the overall risk of a
package is lower than the risk of its parts. Since the operations systems in
place in the market can only see the package one item at a time, she explained,
the trade may exceed a counterparty’s credit risk limit and be rejected.
There
was overall agreement that a system to assess packages as one unit is not yet
in place, but must be in order to ensure efficient market functioning during
the transition to SEF trading under the trade execution requirement.
The
panel explained that the problem lies in the execution phase of the process
rather than clearing stage as the requirement to trade in a central order book
or through a request for quote (RFQ) system creates risk that one party will be
unhedged if the transaction does not go through as a package.
A
futures commission merchant (FCM) representative stated that, currently, a
client will send in a trade on a leg-by-leg basis and if they hit their credit
limit, they can resubmit their order. She noted that the only way to accommodate
package transactions in the current system would be to increase credit limits,
but worried about the additional risk exposure that this situation creates.
There
was general consensus that a consistent and standardized ecosystem and common
language or protocol would need to be adopted by the entire industry in order
to address the problems currently faced when dealing with package
transactions. It was noted that the developers of the coding language
used in these transactions will be coming out with a new product in June or
July that will enable the industry to tag their trades with a marker that shows
each leg as being part of a package.
When
discussion focused on the timeframe for the industry to get these systems up
and running, participants said they were thankful for the 90 day no action
relief for compliance but that it may end up taking closer to 120 days to have
the entire industry set up with the proper technical and operational systems.
For
more information on this roundtable, please click here.