Supporting Statement of Commissioner Brian Quintenz Regarding the Prohibition of Post-Trade Name Give-Up on Swap Execution Facilities
June 25, 2020
I will vote in favor of today’s final rule to prohibit post-trade name give-up practices for swaps executed, pre-arranged, or pre-negotiated anonymously on or pursuant to the rules of a swap execution facility (SEF) and intended-to-be-cleared (Final Rule).
As I have noted previously, I have concerns about the government banning an established trading practice that has evolved from natural market forces to support swaps liquidity provision. Client swap activity is inherently dealer and relationship-sourced. That is why the name-disclosed Request for Quote (RFQ) model has been highly favored over the anonymous Central Limit Order Book (CLOB) model in the client market. Although the Final Rule predicts that the ban on name give-up will result in increased participation and competition in the dealer-to-dealer market, I remain concerned that banning post-trade name give-up will negatively impact dealers’ ability to hedge efficiently on existing inter-dealer platforms, which will ultimately lead to a degradation in the pricing and liquidity provision of swaps trading on dealer-to-client platforms. I am also doubtful that new entrants into the wholesale market will use the advantages of that participation to add any meaningful liquidity in the client market, making it even less certain that the benefits of enhanced competition hoped for in this Final Rule will be passed through to end-users.
Despite my concerns, I am supporting the Final Rule because it adopts an important exception from the prohibition, as well as an incremental approach that will give the Commission and market participants time to transition into compliance, observe the impact of the Final Rule, and make adjustments in the future, if necessary.
For example, the Final Rule includes a significant exception for package transactions that include a component transaction that is not a swap intended-to-be-cleared. The exception would include U.S. Treasury swap spread package trades involving an intended-to-be-cleared swap and a U.S. Treasury security component. These package transactions are rarely traded on dealer-to-client platforms, but make up a significant portion of volume on dealer-to-dealer platforms. Recognizing this important difference between markets is a small but necessary accommodation to ensure package trades can continue to be efficiently executed in light of this mandated change to market trading protocols.
The Final Rule also adopts staggered compliance deadlines, with the most liquid swaps coming into compliance first, and less liquid swaps becoming subject to the ban in July 2021. In the interim, the Commission plans to conduct a preliminary study of the Final Rule’s impact on SEF trading by July 2021, with a further study to be conducted by July 2023. These studies will allow the Commission to assess if the ban on post-trade name give-up is, in fact, increasing competition and liquidity on SEFs, as the ban is intended to do. If a more fulsome analysis reveals that the ban has not yielded its expected benefits, or may not be appropriate for certain products given their liquidity profile, I expect further adjustments will be made to maintain a well-functioning swaps market.
Lastly, I would like to thank staff of the Division of Market Oversight for working with my staff to incorporate many of my comments into the Final Rule.