Comment Text:
Meeting with PIMCO
Friday, February 04, 2011
Memo from
Steiner, Jeffrey L.
CFTC Staff :
Jeffrey Steiner
Tom Leahy
George Pullen
Carl Kennedy
Laurie Gussow
Nela Richardson
Jason Shafer
Jeff Burns
External Attendees :
William G. De Leon (PIMCO)
Libby Cantrill (PIMCO)
Kevin Broadwater (PIMCO)
Additional Information :
PIMCO is a large asset manager representing millions of individuals and corporate clients, endowments, universities, and municipalities. They are not a dealer and do not have a proprietary book.
PIMCO is concerned about three areas of the real-time reporting proposed rule: (1) the definition of “block-trade”; (2) the rounding methodology; and (3) the proposed time delay. In addition, PIMCO suggested that there would be unintended consequences if the rule was implemented as proposed. Specifically, they expressed a general concern that swap dealers may not offer as aggressively because they fear they can’t make money because of front-running. Therefore, concern that these swap dealers will charge PIMCO and, in turn, PIMCO’s clients, more than they are currently being charged.
Definition of “Block Trade”
(i) The proposed rule’s distribution test (i.e., current 95% methodology), which is based off a study of the futures market, is not an accurate reflection of the swaps market.
(ii) Suggestion: Trades which represent a notional or principal amount that is greater than 2/3 or 45% of the notional or principal transaction sizes in a swap instrument during the applicable period of times should be considered a “block trade.”
Rounding Methodology
(i) The proposed rule’s “250+” rounding methodology does not work for every asset class because not every asset class is homogeneous. Therefore, the final rules rounding methodology should be more granular.
(ii) Suggestion: Short term, intermediate, and long term buckets.
(a) Suggest IR swaps have 4 or 5 buckets: 0-2 years, 2-5 years, 5-7 years, 7-12 years, 12+ years buckets.
(b) Suggest 3-5 years buckets for Credit Swaps such as differentiating high-yield versus investment grade CDS, index versus single-name CDS;
(c) Commodities buckets should probably be broken down by the difference in products (i.e., Metals, Energy-type items, Food, etc.).
(iii) Anonymity – they suggested that for interest rate swaps, a 25 bp spread should adequately protect the anonymity of the counterparties.
Time Delay
(i) 15 minutes is too short a time, even given changes in the block definition and rounding methodology.
(ii) Some trades takes hours, some take days or even longer for the dealer to cover. Such added risk will be passed onto PIMCO’s clients.
(iii) Suggests the SEC’s approach may be appropriate and believes 24 hours may be an appropriate “one-size- fits-all” time delay.
Phase-In Implementation
Too much transparency too soon can frustrate the CFTC’s policy goals.
Miscellaneous
(i) Notes that the block definition and rounding methodology are the issues they are most concerned about for the RTPR.
(ii) Believes that when a swap dealer holds onto risk for 48+ hours, such risk becomes proprietary.
