Swap Data Regulation - Block Trade Rules - Comment Letters

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Gavel.png FINAL RULE: This page refers to the proposed rulemaking on block trade rules. For a summary of the final rule, click here.
Dodd-Frank Timeline, Block Trade Minimum Size, Protection of Identities, CFTC
Proposal Date Final Rule Issue Effective Date
February 23, 2012 May 31, 2013 July 20, 2013

At its February 23, 2012 open meeting, the CFTC approved a proposed rulemaking that would group swaps into separate categories, establish minimum sizes for block trades and large notional off-facility swaps in each category, and protect the identities of swap counterparties in connection with the real-time public reporting of swap transaction and pricing data.[1] This rule was originally proposed in conjunction with the final real-time reporting rules at its December 20, 2011 open meeting. The block trade rules were not part of the final rule, but rather were re-proposed in this rulemaking.

On June 25, 2012, the CFTC issued a proposed rulemaking that re-proposed certain provisions pertaining to block trades in swap contracts.[2] The rule would prohibit the aggregation of orders to satisfy minimum block trade or cap sizes. The rulemaking appeared in the Federal Register on June 27, 2012, and the comment period will run until July 27, 2012. As comments are submitted to the commission, they will be featured below.

SIFMA - July 27, 2012

Prohibiting the Aggregation of Orders to Satisfy Minimum Block Sizes or Cap Size Requirements
July 27, 2012

From the comment letter:

  • "It is possible that the Consent Requirement could require our members, as asset managers, to get consent for each client for which they engage in block trades. We do not understand the purpose of such a requirement, nor do we find any reason to require this under the Dodd-Frank Act"
  • "We do not believe it is necessary to require such specific consent; instead a general grant of investment discretion in the investment management agreement, power of attorney or similar document should suffice"
  • "Allowing this requirement to be met by notice, rather than requiring asset managers to get specific consent from clients as in the current rule, would minimize unnecessary burdens and

expense for both the asset manager and its client"

  • The AMG has also noticed a potential ambiguity in the prefatory language to proposed section 43.6...based on this language, 'large notional off-exchange swaps,' which include swaps above the minimum block trade size that are not listed on a SEF or DCM, could technically become subject to the Aggregation Rule."
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Wholesale Market Brokers’ Association, Americas - August 1, 2012

Prohibiting the Aggregation of Orders to Satisfy Minimum Block Sizes or Cap Size Requirements
August 1, 2012

From the comment letter:

  • "the WMBAA urges the Commission to recognize the significant differences between futures markets and OTC swaps markets, including the number of products traded, the average daily trading volume, and, importantly, the distinct statutory regimes."
  • "The WMBAA believes that the Commission’s intent to prohibit the 'aggregation of orders for different accounts in order to satisfy the minimum block trade size or the cap size requirement' specified in proposed section 43.6 does not relate to the concept of 'work-up'"
  • "The WMBAA believes that prohibiting 'work-up' will have significantly harmful implications for OTC swaps markets, to the detriment of market participants in the form of wider bid-ask spreads, less trading volume, and less transparent price discovery."
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Investment Company Institute - July 26, 2012

Prohibiting the Aggregation of Orders to Satisfy Minimum Block Sizes or Cap Size Requirements
July 26, 2012

From the comment letter:

  • "We strongly agree with the Commission’s determination that certain persons, including investment advisers, have legitimate reasons for aggregating orders and should be permitted to treat such orders placed as a block trade if the trade satisfies the minimum block size."
  • We, therefore, fully agree with the CFTC’s proposal to provide exceptions from the prohibition on aggregation for certain persons who may engage in block trades on behalf of their clients."
  • "We, therefore, request that the CFTC not reference Rule 4.7 but instead require that the adviser be registered under Section 203 of the Advisers Act or pursuant to any state or a principal thereof without specifying a minimum number of years registered or where the client assets are deposited."
  • "We request a clarification that only a person transacting a block trade on behalf of a customer who is not an ECP must receive prior written instruction or consent from the customer. We do not believe it is necessary for investment advisers to obtain consent from clients who qualify as an ECP and therefore are eligible to engage in block trades."


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OneChicago - July 11, 2012

Prohibiting the Aggregation of Orders to Satisfy Minimum Block Sizes or Cap Size Requirements
July 11, 2012

From the comment letter:

  • "Similar to already established and enforced OCX rules regarding single stock future block transactions, swap block rules should limit swap blocks to only larger more sophisticated participants similar to Eligible Contracts Participants"
  • We are acutely concerned that the OTC swaps, mandated to move to a SEF or exchange, be subject to same regulatory requirements asour single stock futures; otherwise, we will be at a disadvantage. Consequently, we encourage the Commission to continue building a like regulatory environment for swaps."
  • "We encourage the Commission to work with the SEC, the Financial Industry Regulatory Authority, and the National Futures Association to harmonize regulatory fees between similar transactions."


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Jefferies & Company - May 22, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
May 22, 2012

From the comment letter:

  • "Jefferies believes that by adopting the proposed 67% block trade threshold for interest rate and credit swaps, coupled with a market depth and breadth approach in the post-initial period, the CFTC will have struck a thoughtful balance in establishing appropriate minimum block sizes for block trades. For that we support Proposed Rules."
  • "Jefferies...opposes a 50% block threshold as described in Q33 of the Commission's Request for Comment. Jefferies believes that setting appropriate block thresholds means striking a balance between transparency and liquidity...thresholds set too high could impede liquidity while block thresholds set too low will obscure price discovery."
  • "we support the Commission's use of market depth and breadth as additional measure of market liquidity for determining appropriate minimum block sizes as the data becomes available."
  • " we support the proposal to include multiple levels of analysis for each asset class in order for the proper balance of liquidity and transparency to be achieved."
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TeraExchange - May 14, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
May 14, 2012

From the comment letter:

“[We] strongly urge the Commission to retain the proposed IRS threshold of 67% of the notional value of IRS trades in a particular tenor and currency rather than relying on a formula based on a lower level… Based on the high level of market participant interest, we anticipate that electronification and central clearing in the OTC marketplace will move at a rapid pace. As such, in order to best refine the initial thresholds, rather than locking these formulas into place for a rigid initial one-year period, TeraExchange also recommends quarterly reviews. We believe that quarterly assessments should begin as soon as SDR data is available for review, incorporating not just executed trades but also available non-proprietary market depth data per the query in question 35 of the proposed rulemaking in order to gather a more comprehensive view of available liquidity. More frequent reviews will be more responsive to a dynamic and growing market.”

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SDMA - May 14, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
May 14, 2012

From the comment letter:

“The SDMA submits that the CFTC block trade threshold methodology for interest rate swaps and credit indices is appropriate in its approach of percentage of notional traded set at 67%, but respectfully recommends, that when considered in concert with the market depth and breadth approach discussed in Question 35.a, such a threshold should be set higher at 75% of trade notional. Both the market depth test and the per cent of notional traded test should be taken together for the first year until data gathered becomes significant. In the long run, the market depth test properly considers liquidity as a function of orders not just trades and properly sets the optimal block trade threshold not only for OTC derivatives, but also for other asset classes. Such a test is scalable, easy to administer and would be cheap to create. In today’s technology environment, data capture and accessibility has also become less challenging.”

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R.J. O'Brien - May 14, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
May 14, 2012

From the comment letter:

“We write in support of the CFTC’s 67% Block Rule. Though we would like to see that number set a bit higher (80%-90% range), we understand that the Commission has to strike a balance, given the pressures it is facing…We also support additional measures of market liquidity be applied as the data becomes publicly available, in particular to data sets that look beyond volumes executed but also to both the depth and breadth of the available orders in the specific market. It also follows that as more trading and price discovery takes place on exchanges/SEFs and as more information is reported to SDRs the ability to delineate appropriate block threshold levels will improve substantially.”

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ICAP - May 14, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
May 14, 2012

ICAP makes the following comments in their comment letter:

  • We believe the Commission should take a cautious approach and should not set any block limits during the initial implementation period. The Commission should utilize the information it gathers during the initial implementation period from the Swap Data Repositories (“SDR’s”) to analyze industry-wide market dynamics prior to imposing any block limits.
  • The Commission has referenced the commodity futures block limits established under the principles-based authority granted to the respective futures exchanges. The annual block limit adjustment period for SEF’s as set forth in the proposed rule appears to allow DCM’s greater flexibility to change block limits to meet changing market conditions. We support a principles-based approach and would recommend that SEF’s have the same authority to determine block limits to adapt quickly to changing market conditions. We believe that the swap contracts should never have more restrictive block limits than the like-kind futures contract.
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CME Group - May 14, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
May 14, 2012

CME Group opposes the Commission’s “one size fits all” approach in “determining the swap block levels in the post-initial period because it neither advances the goals of Dodd-Frank nor takes into consideration the individual needs of each particular market.” In addition, they argue that “the 67% rule serves an arbitrary purpose and has no relationship to the explicit goals of Dodd-Frank with respect to block trading of swaps.” They also “believe that if the proposal is made applicable to trading on SEFs and DCMs, it lacks adequate regulatory context given the lack of definition surrounding various aspects of the implementation of Dodd-Frank.”

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Kinetix Trading Solutions - April 20, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
April 20, 2012

In their comment letter, Kinetix addresses concerns with regard to:

  • sparse data and its impact on block threshold calculations
  • options products in particular could pass through liquidity cycles as the price of the underlying moves in relation to the option strike price
  • the possibility of traders moving transactions between product types in order to avail themselves of lower block thresholds
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Wholesale Markets Brokers Association - May 2, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
May 2, 2012

From the comment letter: “The potential implementation of the CFTC’s Proposed Rules, when combined with certain provisions of the SEF Proposal, almost certainly will produce an outcome that is arbitrary, capricious, or manifestly contrary to the statute. The CFTC should strongly reconsider implementation of this regime, as it is inconsistent with statutory authority and would cause irreparable harm to OTC markets… In addition to being inconsistent with the plain statutory language adopted by Congress, the WMBAA believes that imposition of such a restrictive regime will severely impair and fragment the liquidity in OTC swaps markets that rely on anything other than a fully electronic central limit order book or request for quote systems, such as voice-based systems or hybrid systems, which contain a voice component to create liquidity.”

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Morgan Stanley - May 11, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
May 11, 2012

In their letter, Morgan Stanley focuses primarily on the “macro-economic issues involving Block Size Rules and their interaction with certain other proposed and final rules. In particular, [they] are concerned that the Block Size Rules will result in reduced liquidity in the swaps market for all market participants.” Morgan Stanley believes that the Block Size Rule is “critical to the future success of OTC swap markets. It is the ‘final check’ that ensures an appropriate balance between transparency and liquidity. Unfortunately, [they] believe that the rule as proposed will not get the job done.”

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Investment Company Institute - May 14, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
May 14, 2012

The ICI appreciates that the ‘CFTC intended the re-proposal to provide a more tailored approach, one that would increase the transparency of swap transactions without damaging liquidity in the swap markets. We remain concerned, however, that the proposed swap categories are too broad – grouping swaps with vastly different liquidity profiles together – and that the proposed 67-percent notional amount calculation would result in too high a threshold for block trades. We recommend that the CFTC analyze the swap data that it will receive from repositories to refine further the swap categories that will pool swaps with similar liquidities. Moreover, we respectfully urge the CFTC to adopt the 50-percent notional amount calculation that was suggested by the Commission as an alternative approach and to phase-in this standard over a period of time for very illiquid categories of swaps. We also recommend some modifications to the frequency of the calculation as well as the data used in the calculation. We provide our comments in more detail below.”

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Freddie Mac - May 14, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
May 14, 2012

From the comment letter: “Freddie Mac supports the goal of increasing transparency in the swaps markets. We are concerned, however, that the Proposal’s relevant minimum block sizes will materially reduce market liquidity. Therefore, Freddie Mac urges the Commission to consider reducing these minimum block sizes. Specifically, we recommend that the Commission adopt a 50-percent notional amount calculation methodology for determining the appropriate minimum block sizes for interest rate swaps. Thereafter, as the Commission obtains more comprehensive data about the liquidity of the swaps markets over time, it might consider raising the minimum block sizes.”

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ISDA/SIFMA - May 14, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
May 14, 2012

In their comment letter, ISDA and SIFMA comment that:

  1. The appropriate minimum block size framework set forth in proposed section 43.6(b) at the asset class, category, and currency grouping levels is not sufficiently granular to consider vast differences in the trading frequency and volume of different swap products within those categories.
  2. In product categories or currencies that trade below a certain frequency threshold, all transactions should be treated as block transactions.
  3. The Commission should revise its proposed methodology for determining appropriate minimum block sizes from a 67% notional amount calculation to a 50% notional amount calculation in order to align the ratio of block size to daily volume in the swaps market to a level more similar to that of futures markets.
  4. The Commission should revise its trimmed data set mechanism, which is currently calibrated such that it would fail to exclude even the largest transactions done in swaps markets, thus failing to preclude a very large transaction from substantially skewing the block threshold.
  5. The Commission should set the initial cap size as the lower of the relevant block size or interim cap size, and set the cap size equivalent to the relevant block size during the post-initial phase.
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Barclays - May 14, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
May 14, 2012

Barclays believes that:

  • all product/transaction types that are not ‘made available to trade’ and mandated to transact on SEFs (or DCMs) should be reported as blocks for the purpose of post-trade reporting with appropriately calibrated delays
  • for all swap categories, when there are no more than three transactions per business trading day in the instrument these swap categories be treated as blocks for the purpose of post trade reporting
  • a multi-dimensional treatment of block sizes for options is needed in order to provide the scalars necessary to set block sizes that reflect the fundamentals of option contracts and products
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Managed Funds Association - May 14, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
May 14, 2012

MFA recognizes that the “Commission has a difficult task in balancing the twin statutory goals of enhancing pre- and post-trade transparency in the swaps market on the one hand, while also ensuring that market liquidity is not adversely impacted on the other hand. If minimum block sizes are set too low, we believe inadequate market transparency could harm price competition and lead to wider bid/ask spreads. Conversely, if minimum block sizes are set too high, market liquidity could be adversely affected if market-makers (i) become reluctant to transact in size for fear of being unable to hedge their risks before public disclosure causes adverse price movement in the market; or (ii) quote wider bid/ask spreads to offset this incremental risk. MFA’s overarching concern is that the cost of erring in either direction will likely be borne by the end user.”

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Vanguard - May 14, 2012

Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades
May 14, 2012

For the reasons outlined below, “Vanguard supports a phased implementation allowing time for data assessment, swap categorization and block size determinations to preserve liquid swap trading that is fundamental to financial markets and risk management:

  • While critical risk issues presented by the market events of 2008 are appropriately targeted by reforms addressing non-public reporting, margining, and central clearing; the more aspirational goal of enhanced competitiveness through price transparency must be tempered by the fundamental objective of preserving market liquidity.
  • Given the extremely short time delay proposed for the public reporting of market-moving block trades, it is imperative to focus on the size and volume of trades in each swaps category that can be immediately publically reported without market-moving impact.
  • Notwithstanding the CFTC’s expanded list of swaps categories, a much more granularized approach is needed to recognize distinct liquidity pools in assessing appropriate block trade sizes for each category.
  • The CFTC’s uniform, and seemingly arbitrary block size formula must be rejected in favor of a much more nuanced approach focused on minimizing market impact, where the block size is tailored for each swaps category with the possibility for all trades in a particularly illiquid category to achieve block treatment.”
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References

  1. CFTC Open Meeting on One Final Rule and One Proposed Rule. CFTC. Retrieved on February 24, 2012.
  2. CFTC Approves Notice of Proposed Rulemaking Prohibiting the Aggregation of Orders to Satisfy Minimum Block Sizes or Cap Size Requirements. CFTC. Retrieved on June 25, 2012.

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