Leading regulatory change, the Dodd-Frank Act will have its greatest impact on a bank’s options sales force. All clearable and standardized FX options bought and sold across a bank’s sales and trading business will have to be posted on a swap execution facility (SEF) for 15 seconds before the bank’s FX salespeople can execute the trade internally.
“It’s a really interesting rule. Think of the profound consequences for the FX sales force of a bank: they will begin to look very much like futures brokers, and there are plenty of them that haven’t started to plan for that,” says Weisberg in an interview with EuromoneyFXNews. “There will no longer be a partnership with the trading desk, there will be a partnership with the trading venue, or the SEF, that you post your trades on.”
The final regulations for the options market are yet to be published. The Commodity Futures Trading Commission is redrafting the clearing and execution rules after many buy-side participants said the first draft was overly prescriptive. A new version is expected in July.
Should the 15-second rule remain, multi-dealer execution platforms such as FXall will be in a prime position, says Weisberg. In the spot market, FXall has been the top-placed multi-dealer execution platform in Euromoney’s FX survey for past 8 years and has a 10-year track record in that market.
Weisberg is confident the firm can deliver under two different regimes: regulated and unregulated. “On our current active spot trading platform we’ve married a streaming price directly from banks and an ECN, which is of the same order of complexity as what faces the options market today,” he says. FXall operates two completely different execution systems on the same screen, but to its clients, the process is seamless. “This isn’t a new task for us, and we have a lot of our people working for us that have already worked in regulated businesses before.”
FXall has sometimes been too far ahead of the game. Weisberg says FX options were in FXall’s first-ever business plan when the company was founded, but they found the market wasn’t ready for a multi-dealer offering: “Up until this point, I don’t think the market was really interested, nor ready to do these types of things. It’s a different time now and it warrants further investment from us.”
This time the project looks likely to be a success. Some of the functionality on FXall’s existing platform should be transferable to the new regulations. Its collaborative dealing product is one – a bespoke, one-on-one trading relationship between a buy-side client and a bank used to execute super-sized orders. The other is its multi-dealer, single-spot, platform portfolio product.
“We understand what the regulated options market might look like,” says Weisberg. “We understand the practical building blocks, and we understand what the regulations could be, but not all of them.” Moreover, the firm already operates two important execution types that the new regulations will probably require: request for quote (RFQ) and central limit order books.
Nonetheless, for all the excitement that surrounds the levelling of the playing field for execution platforms, Weisberg says there’s still some way to go before SEFs will be up and running. First, trade repositories still need to be built, and requests for proposals to build them have only been solicited recently. Second, central clearing will need to be up and running.
“The SEF game is going to be a long game. You’re better off thinking of it as a marathon rather than a sprint,” says Weisberg. Still, he sees no reason why, once the repository is set up, options can’t start trading on SEFs straight away.
“Why not allow SEFs to operate the way [electronic execution platforms] they operate now, but with the new requirement to report their trades and comply with surveillance?” Weisberg asks. “Then you could use the data to ascertain if there’s a problem in the market.”
As yet, it isn’t possible to pull down a SEF registration off the CFTC website, so working out who else is looking at option SEFs isn’t possible. In the meantime, Weisberg is getting FXall ready for the new rules. But building a trading platform that complies with CFTC requirements is just one aspect of his work.
“You need to look at the total picture. For instance just keeping up with the regulations that come out is a full-time job for two people at FXall,” he says. Weisberg is confident the time and effort – including setting up a regulatory office in Washington DC – will be worth it when the registration is lodged. “When we submit a SEF application, it is with the intent that it has a high probability of it being approved,” he says.
Still FXall doesn’t plan to rush to market. Weisberg wants to get it right: “We’ve seen that mistake over the years. When a new product is rolled out and it’s not the right product, you may get a press release out of it, but you won’t get a business out of it.”