Bloomberg LP sent a letter to the U.S. regulator requesting that it suspend a "flawed" rule that gives one-day initial margin requirements to swap futures contracts traded on exchange platforms.
The final rule, adopted in November 2011, puts a minimum margin requirement that can cover five days of possible losses for similar swaps executed on any other platform. Bloomberg contends that the rule could have "negative consequences" for standard cleared swaps that are to be traded over swap execution facilities or SEFs such as the one that Bloomberg is developing.
In the letter, Bloomberg’s law firm Gibson Dunn & Crutcher LLP threatens to take legal action to block the rule unless a response is received by Tuesday, March 19.
In the letter, sent March 11 to Gary Gensler, head of the Commodity Futures Trading Commission, Bloomberg’s attorney Eugene Scalia, points out that the rule would create "detrimental arbitrage between standardized swaps traded on a SEF and futures contracts with the same terms and conditions traded on a DCM (Designated Contract Market)."
"With ICE, CME and others able to offer futures products that have substantially lower margin requirements than swaps that otherwise are functionally interchangeable, the implications for SEFs (which cannot offer futures) are clear and profoundly disturbing," wrote Eugene Scali, Bloomberg’s attorney.
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Aware of this arbitrage opportunity, exchanges such as ICE are planning to list futures contracts in May that are based on the credit default swap indices that it has licensed. The letter notes that those futures contracts will be subject to the one-day minimum liquidation time.
Scalia also said the distinction in minimum market requirements would undermine the goal of the Dodd Frank Act to promote trading on SEFs, citing comment letters from other market participants, Tradeweb and FXall.
The company wants a one-day minimum liquidation period applied to all cleared swaps and futures, whether they are executed on an exchange or SEF.