What role for OTFs?

Last week the CFTC published another no-action letter with respect to trading swaps on a European MTF. At the heart of the discussion is the question of whether European MTFs can be considered as equivalent to US SEFs. Given that a number of banks within the scope of Dodd-Frank also need to trade swaps within Europe, this is an important issue.

In Europe, the discussion around swaps trading currently focuses on MTFs, with no mention (yet) of Organised Trading Facilities. OTFs are introduced with MiFID II to capture all different types of trading and to fulfil the G20 commitment to move OTC derivatives, where possible, to electronic trading venues. Under the new rules, an OTF can exercise discretion with regard to placing and matching client orders. However, the CFTC has been very clear that SEFs must offer non-discriminatory access and not favour one type of participant over another. So I couldn’t help but wonder, why does Europe need discretionary OTFs? Is the US regulator’s stance a means of supporting the agency model, while Europe favours dealer markets, or are their other considerations? With so much up in the air, those firms offering trading in derivatives markets on a global scale still face uncertainty about the future of the swap markets.