External Meetings: Meeting with Mark Young on behalf of Market Access

Mr. Young discussed the possible status of his client, MarketAxess, as an exempt SEF within the meaning of Sections 2(h)(8) and 5h(g) of the CEA.  He observed that the CEA, as amended by Dodd-Frank, contemplates that an entity can satisfy the trading mandate of Section 2(h)(8) by being an exempt SEF within the meaning of Section 5h(g).  (Section 2(h)(8)(A)(ii) (“execute the transaction on a swap execution facility registered under 5h or a swap execution facility that is exempt from registration under section 5h(f) of this Act”).  While Section 2(h)(8)(A)(ii) refers to exempt SEFs under Section h(f), but that is clearly a miscite: the relevant provision is 5h(g).

Section 5h(g) permits exemption when there is a comparable and comprehensive regulation by another regulator.   Mr. Young observes that the statute does not require identical regulation.  He suggests that his client, MarketAxess, might be a good candidate for exempt SEF status under certain conditions acceptable to the Commission, and seeks feedback on whether the Commission would be amenable to such an action.

MarketAxess is an SEC-registered dealer-broker with an electronic trading system designed for trading corporate bonds.  It uses an RFQ platform.  It is a member of FINRA.  It operates its platform in compliance with all applicable SEC regulations.  It conducts thousands of traders per day, and it wants to conduct a handful of synergistic, complimentary trades (index CDS and single-name CDS) associated with its corporate bond trades.  MarketAxess has spent considerable funds preparing to be a SEF, including regulatory preparation and software changes.  The cost of NFA participation would be substantial.  Moreover, MarketAxess is not a self-regulatory body: there is no fining or disciplinary procedure, other than exclusion when an entity does not comply with its rules.  It asks how receptive the Commission might be to exemption from SEF registration subject to certain conditions.

Conditions mentioned as possible conditions include: (1) MarketAxess would use the same broker-dealer platform and remain in good standing with FINRA; (2) MarketAxess would satisfy any trading platform standards imposed by the CFTC on SEFs.   In that connection, Mr. Young observed that his client’s software was robust and it could adjust.  He also noted that for more liquid corporate bonds, an RFQ may be put out to the entire dealer-community, but for less liquid, that might not always be the case.  (3) MarketAxess would meet reporting requirements for SEFs (even though such requirements do not discuss exempt SEFs).  (4) It could be appropriate to scale up the level of regulation or conditions based on the volume of trading.

There was discussion about whether MarketAxess was regulated as a platform, specifically, by FINRA of the SEC.  In that connection, Mr. Young emphasized that the statute does not require identical regulation under Section 5h(g)..  Mr. Young responded that Section 5h(g) discusses comparable, comprehensive supervision.  For further background on MarketAxess, Mr. Young referenced his client’s comment letters in this rulemaking, which can be found in its comment letters, including
. He noted his client would like, if possible, for a timetrack for decision of approximately one month on any possible no-action relief under Section 5h(g)
XIII. SEF Registration,
CFTC Staff
Elizabeth Ritter, Salman Banaei, Nancy Doyle
Mark Young, Skadden Arps