Back in July 2013Chairman Gensler and Commissioner Barnier
proudly unveiled their "Path Forward", which was supposed to be
the dawn of cross-border cooperation and an end to divergence
of national laws causing liquidity fragmentation and regulatory
This approach was greeted positively by the financial
services industry and in due course the concept of a Qualifying
Multilateral Trading Facility was presented to be the non US
super equivalent Swap Execution Facility.
At the behest of the UK FCA, the Sef/MTFindustry appointed
lawyers to carry out a full gap analysis between Sefs and MTFs.
We engaged with both regulators to assist with designing the
Over time this accelerated approach began to descend into
farce, as explained in my previous articles.
As is the norm, the CFTC couldn't keep up with the timeline
they had dictated and clarity emerged gradually alongside last
minute extensions to no action relief letters.
Finally a deadline was set for expiry of the interim relief
- midnight May 14. As at May 15 MTF applicants for QMTF longer
term substituted compliance would have to be certified by the
As the deadline approached the industry awaited clarity on a
number of issues to enable them to understand what the rules of
the game were.
Most critical was release of the FCA variation of permission
(VOP) that would set out the upgraded Qualifying elements of
the QMTF. But as time progressed this was not forthcoming and
the message from the CFTC to potential applicants was "do
Finally a couple of weeks ago we were notified by the FCA
that the VOP could not be issued because there were still
points of dispute in terms of interpretation of the scope of
the relief between the FCA and the CFTC.
The key element was whether the relief could be applied on a
trade by trade basis/ product segment basis or whether the
entire MTF would have to apply for (and be subject to the
conditions of) relief.
This distinction was absolutely critical for the
practicality of applying for the relief. Let me explain.
MTFs are permissioned operative models that sit within FCA
authorised firms. MTFs operate across a number of asset classes
and products within such asset classes.
For example an MTF might trade interest rate swaps across
multiple currencies, as well as other interest rate derivative
products such as options.
Further, an MTF provides multi-lateral execution services to
a wide array of participants.
Establishing an authorised firm with MTF capability is not
straightforward, has material regulatory capital, surveillance
and monitoring requirements and generally takes 9 months or so
to get approval.
So imagine the implications of having to register and
operate your entire MTF as a QMTF. In effect if we had to apply
for the entire entity we would have to apply QMTF status across
all of our products and be subject to the Q part of the
In such circumstances we would have to apply Sef-like
requirements including the requirement to trade on a CLOB/RFQ
basis for products that are not only not subject to mandatory
trading on a SEF, but are not even cleared and may even be
traded primarily by entities that are not US Persons and have
no interest in trading in this way.
Accordingly if the requirement is to register your entire
MTF entity as a QMTF, the operator would in fact have to decay
the entirety of the rest of their operation that was
inappropriate for such registration.
Further, hiving out the non-QMTF part of the MTF is not
viable: trading platform operators don't tend to have spare
authorised entities with permissions to operate MTFs lying
around to avoid this rather cataclysmic consequence.
Impossible to apply
So the industry engaged. The FCA completely understood and
after vast amounts of engagement and explanation the CFTC
seemed to understand.
The simple truth is that having to apply on an entire entity
basis was impossible for any platforms that wished to service
participants who did not want to fall under the auspices of US
regulation, particularly in non USD denominated products.
This meant that this interpretation made it impossible for
any MTF operator to apply and comply.
The operation of a QMTF on a segmented basis was completely
comprehendible, would comply with the spirit of the Path
Forward and identify to participants in advance of submission
of any order that the QMTF route would be taken and all the
additional requirements would apply.
The Path Forward has been a massive step backwards setting fires on the way.
The CFTC continued to agree, but the message was clear - no
extension of interim relief and no acceptance of any
application where the entire entity did not apply.
All of this was happening 48 to five hours prior to expiry of
the relief, to no avail. And so the relief came and went and no
applications were made because the CFTC made it impossible to
So what does the cross border platform world look like post
14 May? Well it doesn't look cross border!
The world has bifurcated, liquidity fragmented with entities
trading outside the US avoiding CFTC oversight.
US banks have set up non-guaranteed entities to avoid being
caught by CFTC requirements and are of course utilising
entities that do not have the strength of covenants that their
parent entities have.
The result is unquestionably damaging to global liquidity
and capital efficiency as well as cooperation and access for
European entities to the US and vice versa.
Expiry of interlinked reliefs applicable to swap dealers in
relation to non-US swap dealers based in the US (September 15)
and the inter-affliate relief from Sef execution (31 December),
along with the gradual increase in MATT products will further
impact the delineation between global centres.
In effect the CFTC, which stated that it was committed to
working on a basis of flexibility due to the scope and nature
of the rule making process, has not been flexible.
The entire process has been a waste of time and money and
been damaging to cross border regulatory cooperation.
my previous article I was concerned that the Path Forward
may end in a cul-de-sac. In reality the Path Forward has been a
massive step backwards setting fires on the way.
I think the industry is losing faith both in the CFTC's
ability to truly understand the nature and operational
characteristics of the OTC marketplace - they are Futures
people after all - and that any cross border cooperation is
possible and will be cynical in relation to any further
The opening of the doors to liquidity symbiosis has been
closed. History tells you that even if the door opens again
that liquidity - now bifurcated- won't come back.
Never has the Talking Heads lyrics been more apposite: "They
can tell you what to do / But they'll make a fool of you / And
it's alright, baby, it's alright / We're on a road to
Keyser Soze is the pen name of an anonymous