Regulatory bodies on both sides of the Atlantic are pushing for increased transparency in trading and post-trade processing of OTC derivatives. Tradeweb ceo Lee Olesky explains how use of an OTC electronic trading platform can provide the transparency required in the global OTC markets.
Q. How does electronic trading fit into the ongoing market transformation?
We’ve been in the business of electronic trading for over a decade. During that time, thousands of institutional traders have migrated all or some of their business from the telephone to an electronic model. The price transparency and efficiency benefits of making this switch are clear-cut, and it’s inevitable that derivatives will move to an electronic model. More recently we have seen a series of regulatory activities which will help accelerate this natural evolution.
Specifically, regulators in both the US and Europe have proposed changes to the regulatory framework which aim to create greater market transparency by pushing standardized instruments on to regulated exchanges and electronic trading systems. The use of electronic trading systems would also provide the risk reduction and improvements in efficiency regulators are striving for but without sacrificing market innovation and competition.
Q. Do you support the derivatives regulation being proposed by the Obama Administration?
In principle, we are fully supportive of the objectives that have been outlined in the U.S. In particular, Tradeweb recognizes the benefits of promoting the core principles of the proposed Bill, which include transparency, market efficiency and prevention of market abuse. We believe that the requirement that “standardized swaps” that are centrally cleared be traded on a CFTC- or SEC-regulated trade execution facility is appropriate and support the establishment of Alternative Swaps Execution Facilities (“ASEF”), as an alternative to trading on a CFTC-regulated board of trade or an SEC-regulated exchange.
We have also responded in Europe to the Commission Staff Working Paper, which is largely consistent with the themes being discussed in the U.S. This is important, as it is not in the governments’ broader interests for regulatory arbitrage to exist.
Clearly, there are details to be sorted out on both sides of the Atlantic, but at this stage the focus is on getting the main principles agreed. One of the most important of these is the need to maintain the competition that currently exists in the OTC markets. This has driven innovation and growth, and is vital to the health of the industry.
Q. How will the use of electronic trading systems and facilities improve the post-trade processing of OTC derivatives instruments?
The fundamental vision of electronic trading is one of greater automation, connectivity, and efficiency. Linking to third parties is a core part of this value proposition. As an electronic trading venue, Tradeweb is ready, willing and able to connect to any relevant central counterparty.
This structure strikes the balance between fixing system issues and promoting market innovation that widens access to credit for a variety of institutions and interested parties. Also, the availability of multiple points of access to the central counterparty or clearing organization permits electronic trading platforms to continue competing to offer the connectivity and transparency they all provide already.
In order to achieve these objectives, it is vital that at all times each CCP allow genuine open access to any and all trading venues, and that no preferential treatment is in any way afforded to any trading venue, directly or indirectly. CCPs have the ability directly, or indirectly, to distort competition between trading venues through preferential treatment of one trading venue over another. Such preferential treatment could be accidental or a consequence of conflicts of interest.
Q. Beyond the obvious benefits of transparency, how will electronic trading of some OTC derivatives improve the health of the market now and in the long run and in terms of allowance of market innovation and competition?
The success of the OTC markets has in large part been due to the ability of participants to adapt to ever-changing market conditions. Electronic trading has helped evolve the way business is done, while maintaining the fully-disclosed OTC structure, which has been so successful in providing institutional clients broad access to dealer liquidity. As both electronic trading and the regulation of the OTC markets advance, it will be important to find ways to improve transparency and efficiency without stifling creativity or competition.
Q. Are there any other surprising benefits to electronic trading of OTC derivatives?
We’re not surprised at the success of electronic trading because we’ve seen it replicated across so many asset classes. Although electronic trading tends to focus on the trade itself, there is increasing value in some of the other benefits e-trading provides, such as quality market data and a complete audit trail.
* Lee Olesky is the ceo of Tradeweb.
