A Primer for Wall Street Occupiers and Residents Alike

Yearend deadlines have us waylaid in posting a long-awaited Street Controls update; expect text to fill the above-titled post by Dec. 21.

Wall Street Executes Milestone or Perfect PR Stunt?

Downright love fest! The announcement last month that big Wall Street bank supported bond platform Tradeweb had, according to itself, executed the first electronically traded credit default swap ("CDS") in the U.S., EVER, had all the markings of the perfect Wall Street PR stunt.

Take the highest volume producing, big-bank-to-big-customer bond trading platform - that's Tradeweb - and have it electronically execute a couple CDSs (presumably two) for New York-based hedge fund BlueMountain Capital Management, formerly the most outspoken fund on the planet regarding CDS market oddities via its former COO Samuel Cole, who pointed out in a letter to regulators in 2009 what he deemed the unfair "oligopoly" that the world's largest several banks effectively hold in the $32.7 trillion CDS market. Put all that together and whammo!... you've got PR crunk juice immaculate baby, from heaven!

Well, Cole left BlueMountain in August last year. And the biggest CDS clearer remains the bank-created ICE, with which the banks have huge profit-sharing arrangements, and thus prefer to do business (and by threatening not to, it has been argued, maintain sub rosa control over the market). And the CME's fledgling CDS clearing operation, which Cole was vying to strengthen at the time, remains with its little flightless feathers whisking up nary a fleck of CDS clearing business nearly two years later, despite getting a smidge of one on the books in early February, with the kindly help of Deutsche Bank (the executing bank), et al. If this all sounds a bit familiar, it is: you can find similar announcements regarding interest rate swap tent shows here, here and here. (And LCH.Clearnet dominates interest rate swap clearing via SwapClear by nearly 100 percent on trades between the big banks which majority-own the London-based clearer. While U.S.-centric contenders CME Group and Nasdaq could benefit if the big banks shift their allegiance in centrally clearing interest rate swap trades with buy-side asset managers, that would only happen easily if the big banks somehow gain majority shares in CME or Nasdaq: The banks like what they can control, and share ownership trumps exchange "membership" every time, at least in the string-pulling arena. The banks could of course always roll their own, like they've done ad infinitum over the years in the over-the-counter (off-exchange) bond trading sectors, like some proprietary trading firms did most recently with the Eris Exchange, the new Chicago prop trading firm-backed exchange for trading swap futures. Look anyway for the majority of the big banks' support (read: trading volume), per usual, to go to only one venue, based on instrument and customer type, as venue dominance of trading and clearing nearly all bonds and their derivatives is neatly divided according to product and counterparty.)

So the cynic in us says the message we're meant to take from the grand Feb. 10 announcement made by Tradeweb, but almost certainly emanating from the big, CDS swingin' banks?

Look! We traded and cleared CDS, AND with that dastardly, outspoken hedge fund that was so against us, AND we cleared with two clearers, which shows competition, right?... right?... RIGHT?! (This, despite Ice's continuing overwhelming dominance, but never you mind.) Let's stay on message: So... Everything's cool in CDS land. So,... fughetaboutit! Go home and... fughetaboutit! Right as rain here. Everything is. Just... Fughetaboutit! It's done. We've done it. Quiet down, just quiet down and... fughetaboutit,... let the injection take hold, there... now... sleep... just... sleeeep... ahhhh....

Done!

P.S. Food for thought: Why didn't the banks choose MarketAxess, the big-bank-to-big-client corporate bond-focused trading platform, to trade what is the natural speculative counterpart or hedge, or heck, speculative hedge -- meaning CDS -- to coincide with the trading of corporate bonds over MarketAxess? Not enough big CDS bank equity in ol' MKTX? Are the banks finally crowning just one bond platform king?

Addendum: Banks DID remember MKTX, precisely one month later: J.P. Morgan and, you guessed it, BlueMountain, as well as some others, hopped on board corporate bond platform MarketAxess for an e-CDS ring-a-ding, which you can read about here.

Sinon VII: SEC Grants Street's Wish For Single-Dealer Swap Quotes and Admits There is No Real Trading Requirement

Well, we were right. The banks look to win in their efforts to maintain the status quo of big bank control over derivatives trading under new swaps rules the SEC proposed yesterday. Those rules would preserve single-dealer quotes as being allowed in trading on so-called Swap Execution Facilities, or "SEFs." Not that any such trading need occur, as it's not required by Dodd-Frank. As we've said again and again, the swaps "trading requirement" the mainstream press keeps referring to is no trading requirement at all. Trading would occur if and only if any such SEF facilities decide to make any swaps available for trading. Here's the SEC stating it plainly (well, "plainly" as in, only as a regulator is perhaps capable) yesterday:

"To ensure greater transparency in the security-based swaps market and reduce systemic risk, the Dodd-Frank Act sought to move the trading of security-based swaps onto regulated trading markets.

As such, Dodd-Frank requires security-based swap transactions that are required to be cleared through a clearing agency to be executed on an exchange or on a new trading system called a security-based swap execution facility. The Dodd-Frank Act, however, states that the transaction need not be executed on a security-based SEF or exchange if no security-based SEF or exchange makes the security-based swap "available to trade.""

A better way to say this of course would have been: A cleared swap is only required to be traded over an exchange or SEF if such an exchange or SEF makes it available for trading; there is no trading requirement unless the aforementioned occurs." But that would presume the absence of industry-regulator lawyering and its resulting crazy talk. Don't be fooled though; the resulting language was selected very carefully, fought and picked over, and was very purposeful and is aimed at giving political cover to both the industry and its politician overseers, as it relies on the fact that very few citizens, journalists included, read entire passages of voluminous and jargon-thick legislation. Stating first a requirement, and later stating an exception that completely weakens, and in this case, obliterates, the requirement, is a time-honored strategy of regulating industry, as it allows for the appearance of vigorous oversight, while letting the industry involved get its way. It's hoodwinked most of the press, that's for sure.

The Times and the Journal showed yesterday they continue to wrongly believe swaps "must" be, or are "required" to be, traded over an exchange or SEF. Bloomberg reporters in their coverage yesterday weirdly focused on what they confusingly described as the "small" number of firms participating in the swaps markets involved, when that amount is likely to be in the hundreds, if not thousands, as it includes banks, hedge funds, insurance companies, pension funds, etc., across the globe. Of course, accurate records are tough to come by in this labyrinthine marketplace. (And note that if none of these platforms make swaps available for trading - and if the several big banks that control these markets don't want them to, they won't - few swaps customer counterparties will show up for obvious reasons.)

Also, what one Reuters reporter just as confusingly referred to yesterday as "a narrow slice" of the derivatives market: the Bank of International Settlements (BIS) reminds us is a $32.7 trillion market, in the form of credit default swaps, and another of those little bits, equity swaps, is a $6.6 trillion sector, in aggregate. We can presume our Reuters reporter meant "narrow slice" in relative terms, but with the gargantuan albeit aggregate (some trades cancel other trades out) numbers involved, this was at the very least a poor choice of words in describing the size of the market, as it could lead one to believe said market is small. Alas, there's no way of telling given the lack of numbers in the story.

Anyway, all the deep and relevant contextual background can be found in our old post here.