Comment Text:
Dear Mr. Chairman:
Below are comments about the SEF rule as it was first proposed in January of 2011.
1. SEF Definition: Explanation of Sec 37.9 and elsewhere:
No SEF should be required to make “indicative prices” available. Indicative prices do not add price transparency because they do not constitute a firm offer to trade. Instead, they create a potential problem (spoofing).
If SEFs want to experiment by making it possible for participants to post indicative prices, let them innovate. But there is no reason to require such information to be made available on a SEF.
2. 2. 37.9 (a) (1) (ii) (A)
All systems that offer RFQ will also offer a CLOB. Therefore, CLOB prices will be available to the price taker who uses RFQ. Making those prices available via CLOB should meet the requirement to make the “resting” prices available to the price taker. Requiring more than that burdens RFQs with a requirement to duplicate work that has already been done.
3. Access Requirements—Proposed Section 37.202 (page 10 of 46)
The explanatory language might be read as requiring that any system user has clearing arrangements in place with a DCO or clearing member. Such a requirement is at cross purposes with the principle that SEFs can trade non-cleared swaps, and anticompetitive in that it will limit access to SEFs by participants who are not subject to clearing requirements. The language should make clear that membership in a DCO or having clearing arrangements in place are possible means to an end, but not requirements.
4. Investigations and Investigation Reports—Proposed Section 37.203 (f)
Investigation reports should be produced only when there is a finding of a violation or of a need for a warning letter. Requiring reports under other circumstances could provide compliance teams with a disincentive to investigate all potential problems.
5. Section 37.700 Subpart H—Financial Integrity of Transactions
This provision appears to lift concepts from the futures world and apply them inappropriately to swaps. No SEF is better able to judge the credit quality of a counterparty than the company that is accepting the counterparty’s credit. It would add nothing for the SEF to be given responsibility for providing additional oversight that is less effective than, and adds nothing to, the first line of defense. Participants should have every incentive to make their own, informed credit judgments, not to rely on others.
6. Section 37.801-Core Principal 8 Emergency Authority
This provision appears to grant to SEFs authority to require market makers to unwind trades and to transfer open interest. Since a SEF has no positions it has no need to unwind them, and no open interest to transfer. These appear to be authorities better placed with other types of enterprises.
”Suspending or curtailing trading in any swap” is not an emergency decision, but a business decision made in the ordinary course by the management of the SEF, or by participants who enter or leave the activity as they choose.
7. Section IV—Related Matters
SEFs can indeed be small businesses. The best of them are technology companies and they use technology as a substitute for manpower. It would be appropriate for the Commission to think of them as small businesses and tailor or adjust its requirements accordingly.
Sincerely,
Shawn A Dorsch
President
Clear Markets, Inc.
831 East Morehead Street
Charlotte, NC 28202
