Highlights from SEFCON II
By Jason Yoon-Hendricks
October 17, 2011
The eDeriv team attended SEFCON II in early October. A broad cross-section of players were in attendance including dealer, broker and regulatory executives and thought-leaders, sharing views and discussing the challenges raised by the fitful evolution of rules stemming from the Dodd-Frank legislation. Following are some key points on the regulatory developments surrounding the Title VII section of the act, specific to the OTC marketplace and delta one space.
Despite continuing critical commentary from the industry, as of this date there has been limited public acknowledgement from regulators related to specific concerns on the proposed rules. The SEFCON event included industry reps and regulators alike, including a keynote by CFTC Chairman, Gary Gensler. Comments below relate to both the general and delta one-specific impact of the rules, as they are currently anticipated, and reflect our take-aways from the Monday event.
Timely reporting (to data warehouse utilities) remains a largely unchallenged, core requirement of the regulations. There was discussion about the practicality and usefulness of reporting within seconds versus minutes or hours (or days). However, it was also noted that required data fields would likely include trade and processing time-stamp info, something very hard to manage accurately with today's manual workflow.
A clearing requirement for sell-side only transactions also appears no less likely than before but questions remain how this would be managed in the case of more complex, bespoke swap transactions versus plain vanilla types. Considering the scope of products traded on delta one desks, this concern is especially acute for those businesses.
This fragmentation in the requirements extends in many directions, with product type, trade terms (e.g. size related to block reporting) and regional factors (based on non-US underliers, for instance) all dictating slightly or very different regulatory requirements. This was a recurring theme on panels and in the hallways. The consensus, however, seems to be that such disparities are inevitable and simply need to be managed.
Additionally, in our view, the prospects for delta one related to these regulatory challenges are worse than for most other OTC product segments. In addition to the emerging compliance complexities themselves, delta one desks will be governed by both the SEC and the CFTC, the former responsible for (security-based) swaps and the latter for (futures-linked) EFPs.
Given these many challenges, it is hard to envision how a dealer bank would ensure compliance without a more automated, systematic solution, such as what eDeriv offers. This view, as it applies to the other OTC product classes, was echoed throughout the day. The current incumbent inter-dealer brokers, likewise, have a lot at risk. Some indications from that quarter suggest the IDBs are actually positive on Dodd-Frank, the notion being that it formalizes their role as match-maker and liquidity aggregator. Indeed, given the event sponsors (the WMBAA), it's no surprise that the virtues of voice brokerage were raised multiple times (albeit with a nod towards "hybrid" models).
However, that technology investment and workflow automation solutions are, ultimately, critical to regulatory compliance was contested by no one. On this point, there is no debate: the dealers and brokers that move decisively to embrace technology solutions are the players that will prosper in the new OTC derivatives regulatory regime.