Survey of Buy-Side Market Participants Shows Lack of Enthusiasm for the CFTC’s SEF Proposal (with Lofchie Comment)

SIFMA, ISDA and the MFA released a joint survey of buy-side members on the CFTC's proposed Swap Execution Facility ("SEF") rule. The rule, as proposed, requires buyers to submit a request for a price quote (RFQ) from a minimum of five sellers. Timothy Cameron, head of SIFMA's Asset Management Group, stated the CFTC's proposed rule was too restrictive, removing discretion from asset managers and decreasing liquidity in SEF swaps. The results of the survey include the following:

• 84% of respondents indicated that the RFQ rule would result in increased transactions costs;
• 82% anticipated spread widening;
• 76% thought the rule would have a negative effect on liquidity;
• 70% stated they would move trading into different markets; and
• 68% noted that they would look to trade instruments that are not required to be SEF-traded.

Lofchie Comment: Two of my (many) complaints against Dodd-Frank are that we are (i) building a market that no one will want to trade in and (ii) the new market will work less well than the old market. If the great majority of buy-side participants think that the new market will have wider spreads and increased costs, and a majority of them will look to move away from the swaps markets, that means that volume and liquidity will decrease. This leads to a vicious cycle, where decreasing volume increases spreads, which decreases volume still further, and so on. As negative as the results of the industry survey in regard to the CFTC's proposal were, I would guess that a similar survey conducted outside the United States would show an even more worrisome result: that non-U.S. customers do not intend to trade in the U.S. market. The great thing that this survey shows, however, is that the U.S. regulators do not have to rely on the perceptions of individuals (or even on surveys by the trade associations) to gauge the perception of market participants to its proposed rules. In fact, the U.S. regulators can obtain this information themselves (most likely by hiring a market research firm). If the results of the survey were to show that we are in fact building a market that major participants inside and outside the United States are finding unattractive, then perhaps we should rethink our approach.

View Survey in full here (links externally to SIFMA website).See also: Joint Press Release.