Regulation of Derivatives Trading

September 2010

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strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offer to buy or sell secu
Tradeweb — Background

Tradeweb is a leading provider of online markets and a proveinnovator in 

g g lobal electronic tradin

g

• Formed in 1996• Pioneer in developing fixed income electronic trading• L d i l t i t di f t b d ld id Lea

der in electronic trading of government bon

ds world

wid

e

• First to automate multi-dealer-to-customer derivatives trading on• Front-to-back electronic solutions for both buy- and sell-side 

institutional traders institutional traders

• Established global connectivity with clearinghouses and trade 

repositories

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe
Tradeweb — Institutional Fixed Income 

Growth and expansion of Tradeweb’s institutional fixed incombusiness since inception:

1998 2010

Markets

1 20

Liquidity Providers 5 45Liquidity Takers 10 2,000+Average Daily Volume $500 Million $300 BillNotional $ Volume $150 Billion $400 TrilNumber of Trades 33,000 18 Millio

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe
Tradeweb’s Current Regulatory Status

• In the United States, Tradeweb is a broker-dealer registered with 

Securities and Exchange Commission and a member of FINRA.

• The Tradeweb Execution Facility is regulated as an Alternative Tr

System pursuant to Regulation ATS under the Securities Exchanof 1934.

• The Tradeweb Institutional Fixed Income and Derivatives platform 

fully disclosed Dealer-to-Customer request-for-quote (RFQ) execfacility.

– Does not hold customer funds or maintain customer accounts.– Clearance and settlement is done outside of Tradeweb systems.

• Tradeweb is regulated globally Tradeweb is regulated globally. 

– In Europe, the Tradeweb execution facility is regulated by the UK FS

“multilateral trading facility”.

– Additional licenses in Japan, Singapore, Hong Kong, Australia and C

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe
Tradeweb — OTC Derivatives Platforms

Participants have been trading OTC derivatives electronically on the Tradeweb execution facility since 2005.

IRS CDS

Currencies: Dollar, Yen, Euro, 

Sterling, Swiss Franc and 

Swedish Kronor

Indices: CDX, iTraxx

• Launched in 2005 with two currencies• Now 6 currencies• Over 60,000 trades and $5 trillion 

notional since launch

• Launched January 2005• Real-time pricing from all 7 pa

dealers

• Live, two-sided market 

pricin

g 

• Over 180 different companies have 

done a swap trade on Tradeweb in the last 15 months

• 91 trades per day average over the 

p g

range of CDX and iTRAXX ind

• Unique Trading Protocols – Re

Market (RFM) allows user to rtwo-sided, live market from a sd l

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe

last 8 consecutive months

dealer.
Overview

Recently enacted Financial Reform Bill will have wide-sweepinimpact on the OTC Derivatives markets and its participants

R lt P ti i t

• Required to draft rules that are consistent with 

the legislation and which will provide for greater transparency, efficiency, and reduction of 

i k ik

• Concerned that a material disr

structure will impact liquidity

• Desire to protect information le

Regulators Participants

systemic market risk

– Require a majority of swap trades to be 

cleared (reduce risk)

– Drive trading of clearable swaps to regulated 

Desire to protect information le

that could impact market

• Desire to maintain ability to cu

tailor to their risk management 

electronic platforms – SEFs/DCMs/ 

Exchanges (transparency & efficiency)

Tradeweb Solution

The Tradeweb SEF will provide competitive electronic trade execution (RFQ). Sprovide the required level of pre-trade transparency meet the applicable core p

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe

provide the required level of pre trade transparency, meet the applicable core p

and have electronic post-trade links to all CCPs. The Tradeweb SEF will also ablock-size trades and voice assisted trades to be captured, traded, and process
What is a SEF?

The term 'swap execution facility' has been defined as a trading system or 

Legislative Language

which multiple participants have the ability to execute or trade swaps by acbids and offers made by multiple participants in the facility or system, throumeans of interstate commerce, including any trading facility, that- (A) facilitexecution of swaps between persons; and (B) is not a designated contract 

Regulatory Interpretation• SEF definition should not be interpreted merely as a central orde

because that would be redundant of the concept of exchanges/Dbecause that would be redundant of the concept of exchanges/D

the legislation

• Interpretation should recognize the distinction between SEFs and 

and as such, gg p 

 should recognize trading models other than pure ex

– particularly, in light of the manner in which OTC derivatives trad

• Interpretation should be flexible to include various trading models

protocols, participants, access criteria, tradeable instruments, and 

t tdt i

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe

post-trade transparencies
What Should a SEF Be?

Consistent with the goals of the legislation, for institutional users, a SEF should:

• Provide pre-trade price transparency 

from multiple sources that provide an accurate indication of where a trade 

ld t d th ti

• Have the ability to adhere to 

principles that are determineapplicable to SEFs;

could get done on the execution 

facility;

• Incorporate a facility through which 

multiple participants can engage in

• Provide access to a broad ra

participants in the OTC derivmarket, allowing such partic

multiple participants can engage in have access to trades with a 

competitive trade execution (i.e., must have competition among dealers);

• Be a bona fide venue through which to

have access to trades with

a 

range of dealers and a broaCCPs; and

Be

a bona fide venue through which to

• Availability to access all CC

transact swaps business (e.g., venue must have minimum capital requirements);

Availability to access all CC

Trade Repositories

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe
Trading Derivatives on SEFs

Access to 

the SEF the SEF

Pre-Trade Price 

Transparency

Trading Protocol

KEY CONSIDERATIONS FO

TRADING OF DERIVATIVES 

SWAP EXECUTION FACILIT

Clearing

Trading Protocol

Clearing

Post-Trade

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe

Post Trade

Reporting
Key Considerations for 

Trading Derivatives on SEFs

Access to 

• A SEF’s access criteria should be objective and prov

recognition of the distinction between liquidity providdealers)

a

n

d liquidity ta

k

ers (i.

e., buy-side

clie

nts, ma

the SEF

dealers) and liquidity takers (i.e., buy side clients, ma

participants and other participants in the market), whpromote financial integrity and support liquidity in the 

• The key consideration should be to ensure that parti

derivatives market have access to as broad a range the true liquidity providers 

– which will provide a true 

function that might be diluted through a less disciplinended exchange-like system

• A SEF must have pre-trade price transparency with 

instruments available for trading on its facility

• Access to a composite of real-time bid/offer indicativ

on 

prices contributed b

y

partici

patin

g li

quidit

y

provid

Pre-Trade Price 

Transparency p yp p g q yp 

liquidity takers to spot the market in deciding the pricwould like to execute

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe
Key Considerations for 

Trading Derivatives on SEFs

Trading Protocol

• Competition: Create a competitive marketplace that 

the provision of adequate liquidity to market participa

Trading Protocol

• Request for Quote Model Request for Quote Model: A fully-disclosed trading p

disclosed trading p

which the liquidity taker (the client) can request (and multiple, competitive prices simultaneously; the liqui(dealers) are aware of their identities before a trade and have discretion as to whether to respond and/or such t ti counterparties. Th t d l t d f t

The tra

des are complete

d for t

(i.e., no partial fills).

• Market Participants need to be able to customize de

that are tailored to their risk management needs

• Block-Size Trades: SEFs are required to establish r

size trades. 

• A block trade for a swap is a swap with a delta or ris

enough to impact the pricing in the market if it were reported

• For block trades, must also consider liquidity charac

instrument

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe
Key Considerations for 

Trading Derivatives on SEFs

Clearing

• A SEF must have equal and fair access to all the CC

equal treatment with respect to technological implem

• C id fli t f i t t f ti d l i 

Consider conflicts of interest of execution and clearin

same venue

• Regulators need to understand the myriad of swaps 

because it may challenge the notion of what is “standa market of highly customized trades which are not sa market of highly customized trades which are not s

typical exchange-traded market

Post-Trade 

Reporting

• Post-trade transaction reporting requirements should 

to protect provision of liquidity in the marketplace

• Reporting rules need to (i) take into account whether 

will materially reduce market liquidity and (ii) prohibit information in a manner that identifies the participant

• Consider what needs to be real-time v. delayed 30 m• Consider TRACE methodology concerning block size 

size reporting above a certain size)

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe

pg )

• Consider two types of reporting – reporting to regulat

to public
Key Considerations for Core Principles

Access Criteria for Participants

Core Principles should be applied with flexibility 

and consideration for how swaps are traded

• A SEFs access criteria should be objective and provide for a recognition of the distinction between liquidity providers 

dealers) and liquidity takers (i.e., buy-side clients, major swap participants and other participants in the market), which 

promote financial integrity and support liquidity in the market

• The key consideration should be to ensure that participants in the derivatives market have access to as broad a range 

of the true liquidity providers

– which will provide a true price-discovery function that might be diluted through a less d

Access Criteria Criteria for Participants ParticipantsCriteria for Instruments to be Traded

• Needs to recognize the myriad of swaps that are traded because it may challenge the notion of what is “standardized

k t f hi hl t i d t d hi h t it d f t i l h t dd kt

of the true liquidity providers which will provide

a true price discovery function that might be diluted through

a less d

more open-ended exchange-like system

market of hi

ghly customize

d tra

des, which are not suite

d for a typical exchange-tra

d

e

d market.

Conflicts of Interest and Governance Rules

• Electronic markets need and benefit from the bank participation in platforms/venues – they posses critical market exp

provide ca

pital for innovation and more efficient workflow solutions

Conflicts of Interest and Governance Rules

• Electronic markets need and benefit from the bank participation in platforms/venues – they posses critical market exp

p p rovide ca

pital for innovation and more efficient workflow solutions

• There is a significant conflict of interest where CCPs also own execution venues, and such conflict needs to be resolv

rulemaking requiring equal and fair access of other execution venues to the CCP. 

• The agencies should not impose hard caps/percentages of ownership – the approach lacks flexibility and could have 

consequencesp p

• There is a significant conflict of interest where CCPs also own execution venues, and such conflict needs to be resolv

rulemaking requiring equal and fair access of other execution venues to the CCP. 

• The agencies should not impose hard caps/percentages of ownership – the approach lacks flexibility and could have 

consequences

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe

Monitoring for Manipulation and Abuse

• It is imperative for SEFs to have access to sufficient market data to compare to its participants’ trade data
Key Considerations for Core Principles

Ability to Obtain Information 

• SEFs need the authority from regulators to obtain information from its participants to ensure compliance with its rules 

transactions and other information to regulators in accordance with the regulatory rules including timing of reporting

Ability to Obtain Information 

• SEFs need the authority from regulators to obtain information from its participants to ensure compliance with its rules 

transactions and other information to regulators in accordance with the regulatory rules including timing of reporting

Record Keeping and Reporting

• SEFs need fully-automated audit trail• Rules need to be fair in respect to ensuring that reporting of certain trades does not impact liquidity

transactions transactions and other information information to regulators regulators in accordance accordance with the regulatory regulatory rules, including including timing of reporting reporting

• Consider real time v. delayed reporting

Position Limits or Accountability

• This principle continues to be a big issue in terms of a SEF’s ability to understand the parties’ positions (i.e., each SE

full market view to enforce this principle). This would require cooperation among all the venues (SEFs, DCMs and Cfull market view to enforce this principle). This would require cooperation among all the venues (SEFs, DCMs and C

including position information sharing agreements, so that if a position were exceeded, the SEF could block an execu

full market view to enforce this principle). This would require cooperation among all the venues (SEFs, DCMs and C

including position information sharing agreements, so that if a position were exceeded, the SEF could block an execu

Financial Integrity of Transactions

• Financial integrity of transactions will need to be addressed through SEFs requiring each swap executed on the platfo

sent to a CCP

• SEFs may need to require its swap dealers to have an internal credit check of its counterparties and for uncleared sw

ability to enforce documentation between counterparties

Emergency Authority

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe

• SEF will need clear guidelines about communication and coordination with regulators (i.e., when SEF can invoke em

authority and the notice requirements related thereto) but liquidation or transfer of open positions will be difficult for S
Why is RFQ an Acceptable Model 

for SEFs?What is RFQ?A full

y-disclosed tradin

gp , q y ( 

protocol, in which the li

quidit

y taker (the cli

can request (and receive) multiple, competitive prices simultaneousthe liquidity makers (dealers) are aware of their identities before a tis executed, and have discretion as to whether to respond and/or trwith such counterparties with such counterparties. The trades are completed for the full size 

The trades are completed for the full size 

no partial fills).

A pre-trade composite of indicative prices combined with a Reques

trade composite of indicative prices, combined with

a Reques

Quote (RFQ) protocol provides the price transparency and competithat the legislation and rulemaking seek to achieve.

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe
Why is RFQ an Acceptable Model 

for SEFs?

• This model recognizes the distinction between liquidity makers (d

liquidity takers (buy-side clients) – which promotes financial integliquidity on the platform.

The RFQ model strikes the right balance between a buyside s’ risk of information leakage based on risk of information leakage based on the number of the number of

participants who see the trade, and having available to it a wide range of competitive, dealer quotes.

• The facility should maintain a permanent audit trail of the second

details of each trade negotiation and all completed transactions, aparties to receive trade details and access post-trade affirmation venues. 

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe
Conclusion

Tradeweb is supportive of the objectives of the Dodd-Frank Act anthat it achieves such objectives under its current business model. S f peci ically, it: 9 Provides pre- and post-trade price transparency and seamless 9 Ensures efficient trade execution of derivatives; Ensures efficient trade execution of derivatives;9 Provides participants in the derivatives market access to as bro

as possible of the true liquidity providers – which will provide a discovery g g p

 function that might be diluted through a less discipline

open-ended exchange-like system;

9 Provides support for best execution;9 Generates digital records of all trades and trade inquiries; Generates digital records of all trades and trade inquiries;9 Maintains a permanent audit trail; and9 Provides global connectivity to relevant third parties, including 

l i h d t d it i

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe

clearinghouses and trade repositories.
Appendix

PRIVILEGED ANCONFIDENTIAL

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strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offer to buy or sell secu
Pre-trade Price Transparency

Tradeweb’s 

prices provtime view o

derivatives derivatives 

More than 

derivatives 

Tradew

execut d 

te

d a

the pre-trade 

pric

U S Treasuries

Interest rate swaps

U.S. Treasuries

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe

Interest rate swaps
Trade Execution

Client views indicative prices and clicks on a contract

1

Client chooses dealers and

2

Composite Page

Client chooses dealers and

sends trade ticket 

3 Composite Page

Client selectlighted) and 

3

Trading Ticket

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe

Negotiation Page
Digital Record-keeping

User s’ Trad

Trad

provides a p

downloadabl

all trades a

inquiries binquiries b

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe
Audit Trail

User s’ Tr

Tr

History p

second-by-s

of how the 

executed anexecuted an

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contained herein is strictly prohibited. The information provided herein is not offered as investment, tax or legal advice or an offe