Swap Execution Facility
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READ: CFTC Moves the Ball Forward on Swap Execution on JohnLothianNewsletter.com (May 2013) |
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WATCH: 2012 SEFCON III Highlights on MarketsWiki.tv (December 2012) |
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Swap Execution Facilities, or SEFs, were given life by the Dodd-Frank Financial Reform Bill, which requires over-the-counter (OTC) swaps to be cleared and traded on this new type of regulated platform.[1][2] According to Dodd-Frank, any swap that is "made available to trade" must do so on a designated contract market (DCM) or a swap execution facility.[3][4]
The CFTC finalized several execution rules at an open meeting May 16, 2013. The finalized rules include:
- Core Principles and Other Requirements for Swap Execution Facilities;
- The "made available to trade" provision; and
- Block trade rules.
For more information on the rules, view the SEF page in MarketsReformWiki.
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Background
The U.S. Commodity Futures Trading Commission (CFTC) has been given the responsibility to monitor swap execution facilities; the SEC has jurisdiction over security-based SEFs.[5]
Regulations were required to be finalized by July 15, 2011. However, several market participants, including the National Futures Association, requested delays in the implementation of swap execution facilities changes, arguing the current time line for changes was too ambitious. The NFA argued that that time needed to be dedicated to immediately designing and testing new systems for each swap execution facility that contracted with NFA.[6]
On Dec. 5, 2011, the CFTC proposed a rule that would require the SEF or DCM to submit a determination regarding the availability of a swap for trading to the commission for review, taking into consideration eight factors such as size, liquidity, and the width of the bid/ask spread.[7] For more information, visit the MarketsReformWiki page on the proposed rule.
In March of 2011, ISDA published a paper focused on SEFs which concluded that SEFs may play a positive role in the OTC derivatives market. They may strengthen the infrastructure of the market, help prevent insider trading and other market abuse as well as increase transparency and access to markets for smaller participants.[8]
SEFCON
SEFCON is an annual conference sponsored by the Wholesale Markets Brokers' Association Americas Inc., an industry advocacy group made up of five leading inter-dealer brokers. [9] The conference brings together regulators, legislators, lawyers, swaps professionals and other market participants to discuss key issues related to swap execution facilities ("SEFs"), a new financial transaction entity created by the Dodd-Frank Act. The first conference was held in October 2010, three months after Dodd-Frank was enacted.
At SEFCON III, held in November 2012, John Lothian News conducted interviews with key members of the WMBA. These videos can be found here on MarketsWiki.tv
Firms Intending to Become SEFs
The SEF rules have yet to be finalized by the CFTC. When the rules become final, the commission will begin accepting registrations from firms to become SEFs. The following firms have announced their intentions to become SEFs:
- IntercontinentalExchange (ICE is already the major clearing house for certain swaps, including credit default swaps).
- Bloomberg [10]
- BGC Partners
- FXall
- GFI Group
- ICAP
- MarketAxess Holdings
- State Street
- Tradeweb[11]
- Tradition
- Tullett Prebon
Many of the companies had urged the CFTC not to define a SEF too much like a traditional exchange, which has an "open order book" model that publicly lists bids and offers. SEFs should be treated differently, they said, because swaps were generally less frequently traded than futures contracts and a certain degree of anonymity was required to ensure that liquidity in the swap market is preserved.[12]
Early Tests
In November of 2010, online derivatives marketplace Tradeweb facilitated execution of the first fully electronic, dealer-to-customer interest-rate swap that was processed by a central clearinghouse.[13]
In February of 2011, U.S. dollar-denominated swap transactions were executed on the Tradeweb institutional multi-dealer-to-client platform between BlueMountain Capital Management, a U.S.-based hedge fund, and Deutsche Bank.[14]
In a preview of how SEF were expected to function once the rules and registration were complete, six firms completed multi-product trades on the MarketAxess execution platform in March of 2011, with J.P. Morgan acting as counterparty and clearer. The transactions included single-name CDS and credit index trades. Some trades were cleared; others were intermediated, or remained bilateral. The six clients of MarketAxess and J.P. Morgan that were involved were BlueCrest Capital Management LLP, BlueMountain Capital Management, Diamond Notch Asset Management, DCI, LLC, Pine River Capital Management LP, and a large, unnamed U.S. bank. The firms represented a variety of clients that would be impacted by upcoming regulation.[15]
References
- ↑ ICE to register as swaps trading platform, CEO says. Reuters.
- ↑ SEF 101: Deconstructing the Swap Execution Facility. Deriv Alert.org.
- ↑ Q+A-What’s at stake for swap-execution facilities?. Reuters.
- ↑ J.P. Morgan Clears the Air on Derivatives. WSJ.com.
- ↑ Swap Trading Systems Should Be Broadest Possible, ISDA Says. Bloomberg.
- ↑ NFA Calls For Swap Execution Delays. GFS News.
- ↑ Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade under Section 2(h)(8) of the Commodity Exchange Act. CFTC.
- ↑ Swap Execution Facilities. ISDA.
- ↑ About Us. WMBA Americas.
- ↑ Bloomberg launches SEF ahead of Dodd-Frank. The Trade.
- ↑ SEF Operators Eager to Cross the Finish Line. Waters Technology.
- ↑ CFTC unveils new oversight regime for swap trading platforms. Dow Jones.
- ↑ Tradeweb Delivers Milestone in Electronic Swaps Trade. WSJ.com.
- ↑ Press Release. Tradeweb.
- ↑ Press Release. PR Newswire.
