July 15, 2013

MarketAxess Holdings said it filed an application on Friday to become a swap execution facility (SEF), under the Commodities Futures Commission (CFTC) Dodd Frank Act.

MarketAxess operates the largest electronic trading platform for U.S. and European corporate high-grade and emerging market bonds. Specializing in credit instruments, it launched trading in credit default swaps in 2005.

The commission finalized the rules and core principles for SEFS in a public meeting on May 16, 2013. One of the rules that were watered down was the requirement that traders seek quotes from at least five market makers. This was reduced to two participants, and following a one-year transition period, it will be raised to three participants. The block rules for swaps were also finalized, such that any trade above 67 percent notional value in a given product range’s size, can be traded bilaterally, away from SEFs. Block trades will be subject to a reporting delay of at least 30 minutes to help firms hedge their risks.

“We are pleased that the CFTC has finalized SEF rules and we welcome their oversight of our rapidly growing CDS electronic trading platform” commented Rick McVey, CEO of MarketAxess in today’s release. “As an independent electronic trading network with a broad institutional client network and a wide range of trading protocols, we believe that MarketAxess is ideally positioned to facilitate regulatory objectives to create a more transparent and competitive OTC swaps market.”

Over the three years since Dodd-Frank was passed, MarketAxess has expanded the range of execution methods or “trading protocols” it offers beyond the traditional request for quote quote/market (RFQ/RFM) approach to include click-to-trade (CTT). Here an investor can click on the dealer’s live or indicative prices and automatically execute a trade, though a dealer has a final “look back” to confirm the price. In addition, MarketAxess has developed a central limit order book for CDS trading, similar to an exchange all-to-all model, which the company has not yet implemented. The platform currently offers electronic trading solutions in CDS indices, CDS index options and single name CDS.

In order to more effectively help its clients comply with the clearing mandate under Dodd-Frank, MarketAxess will support multiple pre-trade credit checking methodologies that will ensure certainty of clearing for clearable swaps traded over the platform. The firm noted that it has extensive functionality and connectivity to Derivatives Clearing Organizations (DCOs), futures commission merchants (FCMs) and swap data repositories (SDRs). Many other electronic trading operators are expected to register to come SEFs.

On June 5, Bloomberg said it submitted an application to become a multi-asset class SEF, following the official publication of the CFTC’s rules. In addition Bloomberg filed to become a swap data repository (SDR) to enable participants to fulfill their reporting requirements. This will also enable Bloomberg to make real-time post-trade data available to the public, it said, thereby supporting transparency in the swaps market.

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Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...