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Footnote 88- contentious, confusing, and counter-productive

ISDA has published a survey assessing market fragmentation and liquidity dissipation consequent upon confusion and uncertainty surrounding the controversial Footnote 88. The footnote expands the scope of the SEF mandate to effectively include all electronically traded OTC derivatives, obliging even those platforms that do not trade “required products” to register and their clients to abide by onerous reporting protocols. In summary, the survey found that:

  • Liquidity has been fragmented across platforms and national borders, resulting in separate liquidity pools and differing prices for similar transactions.
  • Total derivative trading volume, as a percentage of notional, decreased from October 2, particularly in credit and foreign exchange derivatives.
  • 84% of participants believe non-US persons are avoiding SEF platforms as a result of CFTC rules across all swap categories.
  • 68% of participants believe trading activity with US persons is being reduced or has ceased as a result of the October 2 rule.
  •  Over 50% of the responses indicate market fragmentation, such as the formation of separate liquidity pools for US persons.
  • 61% of participants believe trading has been redirected from electronic to voice trading as a result of the CFTC-SEF rules coming into force.

All survey results are contingent on the exact nature of the questions posed, and ISDA is no stranger to bellowing its own book by bemoaning the effects of the new regulations. However, it is no surprise to see non-US banks preferring not to deal with US-persons until compliance costs and complications can be clearly assessed. The other side of the equation is US firms abandoning electronic platforms and returning to voice execution. On October 24th Black Rock announced it would only trade NDF’s by phone rather than by SEF.  The result of such a split can only be market fragmentation, a loss of liquidity and a reversion to opacity that the regulations were expressly instituted to avoid.

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