Gensler’s Swaps Revolution Begins With GFI Poised to Open Up

GFI Group Inc. anticipates that investors will soon start trading swaps on its platform, finally broadening access to a corner of the market previously reserved for banks.

The shift would be a victory for Gary Gensler, the former chairman of the U.S. Commodity Futures Trading Commission who helped rewrite the rules for the $710 trillion over-the-counter derivatives market. In the model he turned into law, new venues called swap-execution facilities, or SEFs, allow every player in the market -- money managers and banks who traditionally served as their intermediaries -- to trade with each other. Previously, only banks got to buy and sell the derivatives on interdealer platforms run by firms such as GFI.

The revolution Gensler wanted has been slow to develop. In March, seven people familiar with the matter told Bloomberg News that banks were still walled off from their customers on venues owned by interdealer brokers. Dealers were only trading directly with their clients in a smaller segment of the market, platforms run by firms such as Bloomberg News parent Bloomberg LP and Tradeweb Markets LLC. That’s about to change at GFI.

“In the next couple of weeks, we’ll onboard buyside clients to our credit SEF,” Jim Toffey, global head of electronic markets at New York-based GFI, said today during an event with reporters.

Mouse Click

Toffey said the structure offered to his bank clients on GFI’s SEF will appeal to investors because it offers more ways to trade than they can get in the market now. His firm provides order book trading to banks on its SEF, which like an exchange is anonymous and can be done with the click of a mouse. Only after the transaction is done do the traders find out who they bought or sold from, Toffey said.

At other venues, investors buy and sell mainly through an auction process where their identity is known to the firm they’re transacting with. Prices on the auction system also often change from the time of initiating the transaction to finalizing it, unlike on an order book where the price is firm and contracts can be bought or sold instantly.

“There’s a lot more flexibility” on an order book compared with the auction system, Toffey said. “This will start off slowly. It won’t be fast.”

Banks and investors began voluntarily trading swaps on SEFs in October. Four months later, the CFTC required interest-rates swaps to change hands on the systems. Credit swaps soon followed. The CFTC has given temporary approval for about two dozen SEFs, including the ones operated by GFI and Bloomberg LP.


Prior to being regulated under the Dodd-Frank Act in 2010, swaps were bought and sold over the phone or electronically between banks and their customers. The dealers then used interdealer brokers such as GFI, ICAP Plc or Tullett Prebon Plc to arrange offsetting trades with other banks, benefiting from a wholesale market that their customers couldn’t access.

Beginning Feb. 15, the CFTC moved to undo that system by making it illegal to restrict who could trade rate contracts on SEFs. The new trading systems are aimed at giving investors a better chance to buy and sell swaps with each other rather than banks, potentially increasing competition and cutting costs.

Regulators over the last four years have battled derivatives industry opposition on the SEF rules meant to create a less restricted marketplace. Gensler, whose term as CFTC chairman ended in December, made open access a top priority. In November, he warned SEFs owned by interdealer brokers that they must ensure everyone could use their systems.

Asked how his bank clients are reacting to the news that their own customers will be in the mix, Toffey said there was no way to get around the law.

“The view is, it was inevitable,” he said. “The market structure is changing” because of the CFTC mandate for open access, he said.

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