Jim Rucker is the credit and risk officer of MarketAxess Holdings Inc. (MKTX). He joined the company at its inception, after a 20-year career with Chase Manhattan Bank, one of the three financial entities that founded MarketAxess. Earlier this month, MKTX issued a release outlining its views on the European Commission’s Markets in Financial Instruments Directive II (MiFID II). Rucker spoke with JLN’s Doug Ashburn about MiFID, swap execution facilities (SEFs), and emerging regulatory issues.
Q: You have been with MarketAxess since its inception, joining the company after a long career with Chase. Tell us a bit about yourself and your experience as it relates to your function as the credit and risk officer.
A: I spent 20 years at Chase before joining MarketAxess, with about three years in the internal audit department, then various roles in operations and finance in several places around the world. For about five years, I was focused on the bond operations in Europe and the U.S. MarketAxess was founded by three firms: JP Morgan, Chase, and Bear Stearns. (Rick McVey, our CEO, came from JP Morgan). When he was setting up the company, he reached out to the other two firms for people to fill various roles – one of which was head of operations, which became my first role at MKTX.
Q: As risk officer, are you in charge of the regulatory aspects of MarketAxess?
A: We have a general counsel, and he has a compliance department working for him. I address regulation from the business side, assessing the impact regulations will have and preparing the business to meet Dodd-Frank regulations.
A: We are doing things on a number of different levels. First of all, just trying to understand what is happening on the regulatory side: educating ourselves on draft regulations, working with regulators and legislators to both understand and influence the shape of regulations. That is the first piece. The second is that we spend a lot of time out talking with our clients about the regulations and the impact on their businesses – both on the buy-side and sell-side.
We have been making changes to our platform to comply with regulations, to the extent that we know them. Some areas are clearer than others. For instance, SEFs connecting into central clearing counterparties is fairly obvious, so we have been able to do a lot of work already in that area. We have connected into two of the clearing houses. When it comes to trading protocols, however, the rules are much less certain. We have done a lot of work already to create a range of flexible protocols for CDS trading, but we need to wait until we see the final regulations before we complete that.
Q: And, hopefully, they will give you enough time to get your systems and compliance in place.
A: I hope so, too. But, again, we are keeping up. We have a group who have been working to determine everything we think we will need to register as a swap execution facility – things like rulebooks, procedures manuals, compliance with supervisory requirements of a SEF. We are also considering whether certain compliance solutions will be [in-house or] outsourced. So, we are doing what we can to shorten the time it takes us to get registered once the rules become final.
Q: Do you see the biggest challenges in the U.S., or in Europe?
A: Equally. They are at different stages, clearly, with the U.S. further ahead, so we know a bit more about the final regulations; but, at the end of the day, it seems as though a lot of the requirements are going to be similar. I think the challenges are going to be equally between the two. The hope is that we can leverage in Europe a lot of what we have done in the U.S.
Q: MarketAxess sent out a press release that outlined the firm’s views on MiFID II. In the release, MKTX advocated a consolidated-trade-tape system and post-trade transparency, but suggests that a pre-trade transparency regime would not be in the best interest of market participants. Why?
A: It is not that we are against pre-trade transparency, but rather the way in which it is introduced. In MiFID II (actually, what we should be calling MiFIR, as it will be a regulation rather than a directive), it talks about applying similar pre-trade price transparency requirements that currently apply in Europe in the equity markets to other asset classes, including fixed income. That is what we think is not appropriate: requiring, for instance, firms to post firm pre-trade prices for up to certain sizes, is not something we think is appropriate in a market that is as infrequently traded as many of the bonds are in the corporate bond markets in which we operate. It may be fine in very liquid instruments that have continuous active two-way markets, but does not make sense in markets that are thinly traded. Most corporate bonds do not trade that actively.
Q: Is there a request-for-quote (RFQ) system that could satisfy the pre-trade transparency requirements?
A: What we have on our platform in Europe are two things that help a lot for pre-trade transparency. One is, as you suggest, that clients can go out to a number of dealers on an RFQ in a competitive process. We also have prices that are fed in continuously from dealers that are posted on the platform. These cover a broad spread of European corporate bonds. Those prices are “indicative” – clicking on them launches an order at the price shown, which the dealer can accept to execute the trade. That seems to work well in markets that are not so actively traded, where it is hard to maintain competitive, executable prices across such a broad range of instruments. Our view is to let the market decide what is most appropriate, rather than make it overly prescriptive in the regulations.
Q: That would seem to make sense. It also seems to play into another issue discussed at length here in the states – counterparty credit risk. One major concern is entering into a trade from an RFQ, only to find out afterward that you do not have available credit with the counterparty.
A: Right. I was recently presenting to the FIA–ISDA working group that was looking at this issue: In a cleared environment, how do you ensure that there is certainty at the point of execution? It is really all about making sure that the FCM has credit limits available for the client who is trading, so that, at the time a trade is done, you know it is going to make its way through clearing. The [working] group has reached out to the CCPs, and now are in the process of talking to the SEFs.
Q: Finally, I was hoping to talk to you about the concept of regulatory arbitrage, or “regulatory divergence” as it is sometimes called. Since you are involved in both U.S. and European regulation, we would be interested in your views.
A: The way MiFID II is drafted, the scope of firms that could trade derivatives is significantly broader than the way it is defined in the U.S. regulations for SEFs and exchanges. In Europe, in addition to exchanges there are two other categories allowed. One is the multilateral trading facilities (MTFs), which is what MarketAxess is registered as in Europe. Then you have this category of organized trading facilities (OTFs), which are an all-encompassing set of trading venues. What is not clear is exactly which of those venues would be allowed to trade derivatives. In the language, it does talk of a “sub-regime” of firms that could register to trade derivatives; but, it is much less clear exactly which firms, and there is the potential, depending on the next round of draftings, it could end up being broader than it is in the U.S. That could clearly lead to regulatory arbitrage, if the scope of firms allowed to trade derivatives in Europe is broader than it is in the U.S.
One thing we do like on the post-trade transparency side is the way things work with TRACE (FINRA’s Trade Reporting and Compliance Engine). We think it works well, and provides a useful learning tool for other markets.