DE Show and Citadel urged the CFTC to stop the double standard at swaps execution facilities (SEFs) whereby the banks can trade anonymously but the identities of other traders in the marketplace are revealed. The hedge funds attended a Commodity Futures Trading Commission event in Washington yesterday with Chairman Timothy Massad.
Dodd-Frank has not done enough to level the playing field in derivatives, according to these industry participants. They contend that there has become a two-tier marketplace which deters buy-side participants from trading swaps because their names will be revealed and their positions known. Hedge funds must trade on dealer-to-customer SEFs where there they must request quotes on a name disclosed basis. Banks trade on an anonymous basis on dealer-to-dealer SEFs, with their identity revealed only upon trade execution.
Managed Funds Association, an organization representing hedge funds and managed futures firms, released a position paper on this issue this week arguing that the bifurcated market and name disclosure is illegal. The paper contends that both Dodd-Frank and CFTC rules require impartial access to swap execution facilities. It also argues that post-trade name disclosure violates CFTC rule 37.7 on the use of proprietary data and Rule 23.410(c)(ii) on the use of material confidential information.
In November, Massad said the CFTC would look into whether the names of traders in swaps were being inappropriately revealed in post-trade processing. A spokesman yesterday said the issue was still under review.
It’s unclear whether this area might be ripe for a whistleblower. If there is wrongdoing at the company running a swaps execution facility, it might be worth looking into. Dodd-Frank did authorize the CFTC whistleblower program to pay rewards when the enforcement agency collects monetary sanctions in excess of $1 million. On the other hand, the agency may ultimately decide to simply issue a new clarifying rule rather than take action against any of the players involved for the practice.