Gensler Says One-to-One Swap Trading Unlikely to Meet New Rules

Trading systems for over-the- counter derivatives that only link one investor to one bank probably won’t be allowed under new regulations, said Commodity Futures Trading Commission Chairman Gary Gensler.

Swap industry executives yesterday told CFTC staff that mandatory trading systems in the $615 trillion market must be flexible to allow for several ways to buy and sell the contracts. Some of those systems include electronic trading that allow a swap user to trade with one dealer, said Ben MacDonald, global head of trading at Bloomberg LP, the parent company of Bloomberg News.

The Dodd-Frank Act, enacted in July, defines trading on a swap-execution facility, or SEF, as being done between multiple users. The Bloomberg system includes a “single dealer platform,” among other trading options, MacDonald said.

“One to one, that’s hard to say that’s multiple parties,” Gensler said today to reporters at a conference hosted by the International Swaps and Derivatives Association, a trade and lobbying group. “One to one sounds bilateral to me.”

“Bloomberg’s ‘single-dealer’ and ‘multi-dealer’ derivatives trading tools meet the SEF ‘many-to-many’ requirements and the underlying ‘pre-trade price transparency’ goal of the” legislation, MacDonald said in an e-mailed statement. “Single-dealer pages allow enabled participants to view different dealer pages (simultaneously if preferred) that display the price and volume at which each dealer has indicated it will trade.”

Another type of system used to trade swaps is the request- for-quote process, where an investor asks banks to compete to give the best price for a 10-year interest-rate swap, for example. That type of trading should become more popular under the new legislation, said Athanassios Diplas, global head of systemic risk management for global credit trading at Deutsche Bank AG in New York.

“All the debate right now is what part of the spectrum is allowed” to qualify as an SEF, he said today at the conference.

Asked if single-dealer platforms for trading swaps could continue, Brian Archer, head of global credit at Citigroup Inc., said it depends on how the rules are written.

“I predict we will still compete in these markets but the current construct will change,” said Archer, who spoke on a panel at the ISDA conference.

New York Mayor Michael Bloomberg is founder and majority owner of Bloomberg LP.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.