Buy Side Seeks End to SEF Name Give-Up

Terry Flanagan

The practice of name give-ups is hindering the adoption of interdealer broker swap execution facilities by the buy side, according to an industry group.

“As long as post-trade name disclosure is allowed to continue on IDB SEFs for anonymously executed, cleared swaps, otherwise eligible buy-side participants will continue to be deterred from participating in these markets, and the two-tier swaps market will persist,” according to a March 31 comment letter by the Managed Funds Association.

The MFA is urging the U.S. Commodity Futures Trading Commission to prohibit name give-ups for anonymously executed, cleared swaps.

The practice of post-trade name disclosure originated in anonymous markets for uncleared swaps, where participants reasonably needed to limit the firms with which they may trade in order to manage counterparty credit risk. Further, to record each new bilateral swap with a given counterparty on their books, participants need to learn the identity of the counterparty with whom they were matched.

However, the successful implementation of straight-through processing for SEF-executed trades, including the pre-trade credit check process, has eliminated any need to use post-trade name disclosure to either manage counterparty credit risk or facilitate clearing submission.

Post-trade name disclosure nevertheless continues to occur as a routine practice on IDB SEFs. When a swap trade is executed by voice brokerage, the IDB SEF typically discloses by telephone to each transacting party the name of the other party to the trade. When the swap is executed electronically, the IDB SEF typically sends an on-screen execution message to each transacting counterparty that discloses the name of the other party to the trade.

Post-trade name disclosure can also occur through middleware and associated post-trade affirmation processes that certain SEFs use to route trades to clearinghouses.

MFA maintains that for swaps that are anonymously executed and then immediately cleared, there is no proper purpose for a party to the cleared swap to know the identity of its original executing counterparty.

Once the registered derivatives clearing organization accepts the trade for clearing, the trade exists only as a cleared trade. The obligations to perform on a cleared trade run only between the DCO and the party to the trade. In a cleared trade, the DCO is the sole counterparty to each of the original transacting parties, and the original transacting parties have no rights or responsibilities with respect to each other.

As a result, MFA believes that the legacy practice of post-trade name disclosure no longer has a legitimate commercial, operational, credit or legal justification in cleared swap markets where transacting parties face the clearinghouse and are not exposed to each other’s credit risk following trade execution.

“The disclosure of an original counterparty’s name following the execution of an anonymous, cleared SEF trade is a source of random and uncontrolled information leakage for buy-side firms,” the letter said, “It deters buy-side firms from trading on IDB SEFs because it reveals a firm’s private trading positions and proprietary trading strategies to competitors or dealers.”

In contrast, when a buy-side firm discloses its identity and trading interests in the RFQ market, a buy-side firm has control of the associated information leakage because it can choose to whom it sends an RFQ.

Featured image by treety/Dollar Photo Club

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