The Wholesale Markets Brokers' Association Americas
4th Annual, Monday, November 18, 2013,
Grand Hyatt Hotel at Grand Central Station, New York, NY
August 29, 2011, Bloomberg News, 8:53 pm
Unlike Banks, This Wall St. Group Embraces Dodd-Frank
By BEN PROTESS
Brendan Hoffman/Bloomberg News Gary Gensler of the Commodity Futures Trading Commission in 2010 at Sefcon, a conference for derivatives brokers.
While the United States military has Defcon, the tiered alert system used during times of national crisis, Wall Street has fashioned a critical event of its own, Sefcon.
The industry conference known as Sefcon is devoted to the relatively obscure swap execution facility, or SEF, the electronic derivatives marketplace designated under the Dodd-Frank Act, the sweeping financial regulatory overhaul. With Washington cracking down on derivatives, Sefcon's nod to Defcon was not coincidental.
"I thought that Sefcon would give people a sense of urgency," said Chris Ferreri, a co-founder of the event and a managing director at ICAP, the largest derivatives broker for banks, which plans to register with regulators as a swap execution facility.
As regulators complete new derivatives rules in the next few months, more than 30 companies — including Bloomberg L.P. and Tradeweb Markets — are maneuvering to qualify for SEF status, according to the Commodity Futures Trading Commission. To ramp up for the regime, the firms are spending millions of dollars to hire lawyers and lobbyists, form trade groups and develop conferences like Sefcon.
Unlike banks that loathe Dodd-Frank, the derivatives trading platforms consider the law a boon to the bottom line, cementing their longtime business model into the regulatory code.
"Most of what we're doing is preparing for the future," said Richard M. McVey, chief executive of MarketAxess, which plans to become a swap execution facility.
Although the term SEF first appeared in Dodd-Frank, electronic derivatives marketplaces have existed for several years. Some $600 billion worth of derivatives trade privately on these platforms — through the phone or online. The rest are bought and sold on regulated exchanges owned by stalwarts like the CME Group.
"We're not Johnny-come-lately," said J. Christopher Giancarlo, an executive vice president at the GFI Group, which plans to register as a swap execution facility.
But after the financial crisis, when derivatives nearly caused the downfall of once-mighty firms like the American International Group, lawmakers and regulators moved to keep a closer eye on the industry. Under Dodd-Frank, companies must now trade credit-default swaps and other derivatives through established exchanges or SEFs, a tightly regulated version of the existing platforms.
The firms have spent the last two years getting organized for the new oversight.
In June 2009, five of the largest derivatives brokerage firms huddled at Bayard's, the historic Lower Manhattan restaurant in the India House at Hanover Square. Over lunch in the Jewel Room, the competitors came together for the inaugural meeting of their industry's first trade group.
"We decided it was time to speak with one voice in Washington," said Mr. Giancarlo, of the GFI Group.
GFI has since added three senior compliance officers, and has plans to hire a dozen or so more. MarketAxess has tripled its swaps technology team since Dodd-Frank was enacted.
Former policy makers and Congressional staff members are in high demand, as trading platforms look to increase their influence in Washington. In April, ICAP hired Patrick McCarty, the former top lawyer for the Commodity Futures Trading Commission and a Senate staff member who helped write Dodd-Frank's derivatives section. Robert Paul, once the general counsel for the commodities regulator, recently joined Tradeweb to head up its SEF compliance efforts. And MarketAxess recently retained the prominent derivatives lawyer Mark Young, a partner at Skadden Arps and a former regulator.
The firms, and their recent hires, have focused their attention — and resources — on lawmakers and regulators. The Wholesale Markets Brokers' Association Americas, the trade group formed at Bayard's, spent more than $1.3 million on lobbying over the last year and a half.
During the same period, the industry has sent more than four dozen comment letters and secured private meetings with top officials in Washington. Mr. McVey of MarketAxess met about Dodd-Frank earlier this year with representatives of Senator Charles E. Schumer and Senator Kirsten E. Gillibrand, both Democrats of New York.
The industry's efforts are yielding results. Representative Scott Garrett, a Republican from New Jersey, teamed up with a group of New York Democrats in July to sponsor the Swap Execution Facility Clarification Act, which would force regulators to back off some harsher regulations. The Commodity Futures Trading Commission is weighing softer rules after receiving a flurry of complaints about its plan to curb Wall Street's control over derivatives exchanges, according to people with knowledge of the discussions.
While the firms await final rules from regulators, they have started an aggressive public relations campaign. In March, Scott O'Malia, a Republican member of the Commodity Futures Trading Commission, hosted a SEF technology showcase, an event that some industry officials called Sefapalooza. Earlier this month, MarketAxess held its annual summer cocktail event for analysts and journalists at the rooftop bar of a New York hotel.
Now the industry is gearing up for Sefcon II on Oct. 3 in New York, during which the Commodity Futures Trading Commission chairman, Gary Gensler, is slated to give the keynote address. Firms are sparing little expense, doling out $3,500 to operate a booth and $12,000 to be a "gold" sponsor.
"My vision was to have a conference that would allow a venue for market participants to better understand the challenges that the new category of SEFs face," said Mr. Ferreri, the Sefcon co-founder. And as for the Sefcon name? "I'm a big brand guy, and it just stuck."