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Bloomberg Weighs in on Swap Regulations

December 12, 2012

Bloomberg intends to register as a swap execution facility (SEF) to provide our clients a compliant platform to trade derivative products, and we remain actively engaged with regulators in the rule making process. 

As an independent entity with a customer base evenly distributed between buy-side and sell-side participants, we are not beholden to anyone, nor are we biased toward any particular element of the market.  We are a leading trading platform for over-the-counter (OTC) derivatives and a data-driven member of the financial services community. Our goal is to bring efficiency and transparency to the marketplace — including for the highly complex derivatives market.

For these reasons, two years ago Congress asked Bloomberg to testify on regulations relating to OTC derivatives. We were concerned then that the way Dodd-Frank regulations could be interpreted and then implemented could inhibit market transparency and raise costs for the end user. Unfortunately, those concerns are now a reality.

It is our opinion that current regulations and the delay in passing legislation has created a less than optimal marketplace.

Market participants are concerned that differences in initial margin requirements (or upfront costs) for trading financial swaps versus standardized swap future contracts could incentivize investors to use an imperfect instrument to hedge their risks. Furthermore, the derivatives industry is concerned that there are no statutory requirements to report trades to the public or to regulators, which can lead to less transparent pricing.

Bloomberg is agnostic to what instruments our clients trade, but we do want to ensure we provide them the access and tools they need for these markets.

As a result, we are asking:

–  the Commodity Futures Trading Commission (CFTC) to level the playing field on swap future block size, public reporting and margin requirements,

– Congress to explore making futures fungible in the same manner as swaps, and

– the Government Accountability Office to conduct an impact study that analyzes how the conversion of financial swaps to swap future contracts will affect systemic risk, transparency, competitiveness, market participant choice, consumer protections and the other important public policy issues Congress sought to address in Title VII.

Bloomberg’s number one priority is to provide our clients with efficient and effective ways to interact with the market, and we intend to work with government and market participants to ensure that happens.

To read the full written testimony we submitted in collaboration with GFI Group, ICAP, Parity Energy, Thomson Reuters, Tradeweb and Tradition, to the U.S. House of Representatives today, click here.  

— Ben Macdonald, Bloomberg’s Global Head of Fixed Income