30 Jan Regulators Scan Interdealer Swap Brokers
CFTC has its eye on the IDBs
Voice brokers – those thick-skinned middlemen who match up client interests in swaps (and other products) were mistaken by regulators to be executing highly complex, thinly traded, bilateral contracts. As a result, the CFTC thought interdealer brokers (IDBs) needed rules to provide greater price discovery and transparency for the trades they executed.
IDBs do not risk their own capital. Rather, they bring buyers and sellers together. Their clients are dealers. Far from executing complex bespoke contracts, IDBs execute the most actively traded vanilla swap contracts (Market Convention Swaps). In fact, a transaction only takes place between counterparties with sufficient credit and tenor lines with each other. If one party does not have sufficient credit line going out to the maturity date of the swap, the IDB seeks another counterparty.
Does Macy’s Tell Gimbals?
The analogy “Does Macy’s tell Gimbals?” is part to the reason why swap dealers don’t call other swap dealers with their market interests. It’s also very inefficient for (the currently) 65 registered swaps dealers to call one another directly. Information needs a central point from which to be disseminated.
Industry reps successfully presented these concerns and the CFTC will likely loosen some of the initial rules as they prepare for a final vote on the rules for Swap Execution Facilities (SEF) over the next few weeks.
The five largest “voice brokers” GFI (GFIG.N), ICAP (IAP.l), Tradition (CFT.S), Tullett Prebon (TLPR.L) and BGC (BGCP.O) will look upon these discussions with great interest. Voice brokering aside, they need to protect their competitive position in Electronic Execution. This space now includes companies like Bloomberg, Tradeweb and MarketAxess.
I mean, who will teach the next generation of city-bound wannabes cockney rhyming slang? I for one will miss hearing “Pick Up the Dog” (accompanied by the sound of barking men in the background).
N.B.: “Pick Up the Dog” = Dog & Bone rhythms with phone = “pick up the phone” – I just love that English slang.