Our privacy policy describes how Fidessa uses cookies on our website. If you continue using our website, you are consenting to our use of cookies. OK

“It’s fragmentation, Jim, but not as we know it” – why Dodd-Frank won’t work

Interesting last week to see that GFI has applied to the CFTC to become a futures exchange. This follows on from ICAP’s purchase of Plus Markets (now ISDX) and so it surely can’t be too long before the other IDBs follow suit and execute their own regulatory hedges too. What they are worried about is that the regulatory regime around swaps seems to favour futurisation rather than SEFs and so will hand the keys to the kingdom over to the likes of the CME, ICE and other derivatives exchanges. This is leading to a headlong rush to set up futures exchanges and so we may see a similar type of market fragmentation that equity markets experienced thanks to RegNMS and MiFID. But, because derivatives contracts are specified (and owned) by their parent venue, they are tied to that venue alone. This lack of fungibility will do nothing for transparency (other than make it worse), and even less for liquidity. Imagine if you could only sell the Microsoft or Vodafone shares you own back at the same venue where you bought them. So, hardly a recipe for best execution either then.

Maybe we can learn a lesson from US equity options markets which operate a multi-market structure (11 at last count, soon to be 12) and yet standardise all contract specifications through one central body, the OCC. This provides the trading community with choice and allows market operators to experiment with different business models too. Even better, there is one standard record of what actually happened in the OPRA time and sales feed. Simple, transparent, competitive – now, what was it again that Dodd-Frank was supposed to be about?

One Response to ““It’s fragmentation, Jim, but not as we know it” – why Dodd-Frank won’t work”
  1. Mark Brennan says:

    Steve – excellent piece and, as we discussed, a fairly compelling idea. However, I still maintain the vertical juggernauts (read, CME) will not willingly cede their IP (i.e., open interest) to a truly centralized clearing model unless the CFTC steps in and wrests control from the vertically aligned DCOs and moves clearing to a truly centralized, utilitarian organization – as the SEC did with the OCC in the early 70s.

    But there’s no question that the potential proliferation of futures exchanges will not necessarily help end users and indeed calls into question the unintended consequences of Dodd Frank.

Leave a comment

Copyright © 2019 Fidessa Group Holdings Limited. All rights reserved.

The information contained within this website is provided for informational purposes only. Fidessa will use reasonable care to ensure that information is accurate at the time it is made available, and for the duration that it remains on the site. The information may be changed by Fidessa at any time without notice. We also reserve the right to close the website at any time. No representation or warranty, expressed or implied, is given on behalf of Fidessa or any of its respective directors, employees, agents, or advisers as to the accuracy or completeness of the information or opinions contained herein or its suitability for any purpose and, save in the case of fraud, all liability for direct, indirect, special, consequential or other loss or damages of whatever kind that may arise from use of the website is hereby excluded to the fullest extent permitted by law. Any decisions you make based on the information in this website are your sole responsibility and information on the website should not be relied upon in connection with any investment decision.

The copyright of this website belongs to Fidessa. All other intellectual property rights are reserved.

Fragulator® is a registered trademark of Fidessa Group Holdings Limited.

Reproduction or redistribution of this information is prohibited except with written permission from Fidessa.