Regulatory Arbitrage Concerns Stir SEFs

Terry Flanagan

MiFID II delegates broad powers to determine which products get traded on platforms.

Under MiFID II, the European Securities and Markets Authority (ESMA) will be given broad powers to determine which derivatives get traded on organized trading platforms, such as regulated markets, MTFs, or OTFs.

That’s raising the potential for regulatory arbitrage between the U.S. and Europe.

The possibility of regulatory arbitrage between the U.S. and Europe is a concern,” Jim Rucker, credit and risk officer at MarketAxess, told Markets Media. “However, we will not have a clear answer on this until the regulations are finalized, and we see more detail from ESMA and the European Commission on the rules surrounding derivatives trading.”

Operators of swap execution facilities say that U.S. regulators appear inclined to offer market participants greater choice in choosing the method of execution for OTC swaps (e.g., voice-based and central limit order book or CLOB).

“Until the final rules are published by the CFTC and SEC, there remains uncertainty about the allowable methods of execution on SEFs,” said Rucker. “However, it seems clear that SEFs will have alternatives, for instance, between request for quote or central limit order book protocols.”

MarketAxess intends to register as a SEF at the earliest opportunity.  In Europe, it already operates as an MTF.

MarketAxess electronic trading platform for trading corporate bonds allows institutional investor clients to request competitive, executable bids or offers from multiple broker-dealers simultaneously, and to execute trades with the broker-dealer of their choice.

MarketAxess also offers a number of trading-related products and services, including: market data to assist clients with trading decisions; connectivity solutions that facilitate straight-through processing; technology services to optimize trading environments; and execution services for exchange-traded fund managers and other clients.

Technology products and services revenue, which includes revenue for technology licenses, support and professional services, increased 9.4 percent to $3.8 million for the third quarter of 2011, compared to $3.5 million for the third quarter of 2010, MarketAxess reported.

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