Streetwise Professor Critiques BOE Staff Working Paper

Responding to the findings of a Bank of England staff working paper ("BOE Paper") that favor the liquidity impact of swap execution facilities ("SEFs"), University of Houston Finance Professor Craig Pirrong asked "the dog food question": "If the dog food is as great as the ads say, why don't the dogs eat it? If SEFs are so much more liquid, why don't traders flock to them?"

After criticizing the BOE Paper's findings on liquidity, Professor Pirrong pointed to another of its findings regarding the fragmentation of the interest rate swap along geographic/currency lines, which showed SEFs gaining far lower penetration in Euro-denominated swaps dominated by European banks that are able to avoid the SEF mandate. He noted that "[t]he choices of those who have the choice strongly suggest that the statistical evidence purportedly showing lower execution costs on SEFs is flawed and misleading."

Professor Pirrong emphasized that "there was never a compelling case – or even a weak one – for forcing diverse market users with diverse transactional needs to use a one-size-fits-all execution method." He praised CFTC Chair Timothy Massad's recent call for a "free-to-choose approach" instead.