The Commodity Futures Trading Commission will allow more swaps to be traded over the phone than initially indicated under proposed Dodd-Frank Act reforms, according to people familiar with the matter.
Chairman Gary Gensler outlined the changes in a meeting two days ago in New York with executives of firms that want to create regulated entities allowed to trade swaps, known as swap execution facilities, or SEFs, according to two people who attended.
The details of what will be allowed are still being worked out for the final draft rule, which is expected to be shown to the four other CFTC commissioners today, according to one of the people, who asked not to be named because the discussions are private.
The change in phone trading contrasts with the proposal written in the Federal Register in January 2011, which said that “entities offering the following services do not comply with the statutory definition of a SEF: one-to-one voice services for the execution or trading of swaps (other than for the execution of block trades).”
Trades in interest-rate, credit-default and other types of swaps historically have been done over the phone in negotiations between banks and their customers. Gensler, with the backing of Congress through the Dodd Frank reforms passed in 2010, has made electronic trading of the instruments a central feature of regulation in a market with $648 trillion of contracts outstanding.
David Gary, a CFTC spokesman, declined to comment.
Expanded phone trading would be a victory for inter-dealer brokers who facilitate transactions between banks. The firms, which use a combination of phone and computer trading to match buyers and sellers, lobbied the CFTC through the Wholesale Market Brokers Association, Americas to allow flexible methods of trading.
The association’s members include ICAP Plc, Tradition Financial Services Inc., GFI Group Inc., BGC Partners Inc. and Tullett Prebon Plc.
The CFTC’s proposed rule for SEFs allowed for so-called request-for-quote systems in which swaps buyers and sellers are required to ask at least five other participants for a price. How that will be reconciled with the expanded phone trading is one detail that still has to be worked out, said one of the people at the meeting, which was held after the Securities Industry and Financial Markets Association annual conference.
Firms that have said they want to create swap execution facilities include the members of the inter-dealer brokers association, Phoenix Partners Group LP, Javelin Capital Markets LLC, Tradeweb LLC and Bloomberg LP, the parent company of Bloomberg News.
The so-called notional value of contracts in the market doesn’t represent actual money that has changed hands and is used to calculate periodic contract payments.