Swap Execution Facility

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Swap Execution Facilities Regulation

CFTC Open Meeting, May 16, 2013

Swap Execution Facilities Regulation - Comment Letters

CFTC Final Rule: Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade

SEF White Paper - ISDA - March, 2011

Swap Execution Facilities - A Comparison of CFTC and SEC Rule Proposals

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. 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.

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.

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.

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 time needed to be dedicated to immediately designing and testing new systems for each swap execution facility that contracted with NFA.

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. 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.

In September 2012, the U.S. District Court for the District of Columbia vacated a Dodd-Frank rule making related to position limits, concluding that the CFTC failed to follow Congressional intent in implementing its rule. After discussion, debate, revisions, and public consideration, the CFTC plans to adopt a final rule implementing SEF core principles and other requirements.

List of SEFs

The SEF rules were approved by the CFTC on May 16, 2013, and became effective August 5, 2013. The commission has begun accepting registrations from firms to become SEFs. As of May 9, 2014, 24 firms have applied:

On January 22, 2016, the CFTC announced its first round of permanent registrations. which include 10 of the 23 previously temporary registrants.

• 360T - 360 Trading Networks, Inc. - permanent as of January 22, 2016.
• BGC Partners - BGC Derivatives Markets - permanent as of January 22, 2016.
• Bloomberg - permanent as of January 22, 2016.
• Clear Markets - CE SEF was granted temporary registration as of May 13, 2014.
• CME Group - permanent as of January 22, 2016.
• EOX Exchange- EOX Exchange LLC - withdrawn as of February 23, 2015
• FlexTrade - FTSEF LLC was granted permanent registration as of May 26, 2016.
• GAIN Capital Group - GTX SEF was granted permanent registration as of May 26, 2016.
• GFI Group - GFI Swaps Exchange LLC - permanent as of January 22, 2016.
• Intercontinental Exchange - ICE Swap Trade LLC was granted temporary registration as of September 20, 2013.
• ICAP - ICAP SEF (US) LLC, was granted temporary registration as of September 27, 2013. Additionally, ICAP Global Derivatives Ltd. was granted temporary registration as of May 9, 2014. Both received permanent status January 22, 2016.
• Integral Development Corp. - INFX SEF Inc. - withdrawn as of June 3, 2015.
• Javelin Capital Markets - Javelin SEF LLC - permanent as of January 22, 2016.
• LatAm SEF, LLC - permanent as of January 22, 2016.
• LedgerX SEF was granted temporary registration as of September 8, 2015.
• MarketAxess Holdings - MarketAxess SEF Corporation - permanent as of January 22, 2016.
• State Street - SwapEx LLC was granted temporary registration as of September 13, 2013.
• SuperDerivatives - SDX Trading LLC - withdrawn as of June 25, 2015, upon the acquisition of SuperDerivatives by ICE.
• SwapEx LLC - StateStreet's SwapEx LLC - permanent as of January 22, 2016.
• TeraExchange - TeraExchange LLC was granted permanent registration as of May 26, 2016.
• Thomson Reuters Thomson Reuters SEF - permanent as of January 22, 2016.
• Tradeweb - DW SEF LLC (cash-settled interest rate swaps) and TW SEF LLC (cash-settled interest rate swaps and credit default index swaps) were both granted temporary registration as of September 6, 2013. Both were granted permanent status as of January 22, 2016.
• TrueEX - trueEX LLC was granted temporary registration as of September 20, 2013.
• Tradition - Tradition SEF, Inc. - permanent as of January 22, 2016.
• Tullett Prebon - tpSEF Inc. - permanent as of January 22, 2016.

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.

When the final rules were issued in June 2013, registration as a SEF required a minimum trade functionality, as defined by having an "order book", and offer "impartial access" to its markets, and any transaction not qualifying as a block trade must wither trade on the order book or on a request-for-quote (RFQ) system. For more information, visit the SEF final rule page in MarketsReformWiki.

From Early Tests and Trials to Fully Functioning SEFs

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.

In February of 2011, U.S. dollar-denominated swap transactions were executed on the Tradeweb institutional multi-dealer-to-client platform Then, in March of 2011, six firms completed multi-product trades on the MarketAxess execution platform, 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.

In September 2013, just before the October 2 compliance date for SEFs, MarketAxess completed the first live trade CDS trade with pre-trade credit checks, using Traiana's CreditLink platform. Under SEF rules, trades may not be completed unless credit between the parties involved in the trade is available. CreditLink acts as a centralized hub that monitors credit availability across venues and allows for real-time pre-trade credit checks.

The CFTC made its first determinations on January 16, 2014 of which classes and tenors of swaps will be "made available to trade," subjecting them to the mandatory execution requirements beginning on February 15, 2014 the date at which the first swaps will be subject to the execution requirements. For more information on the "made available to trade" provisions, including a summary table of specific swap products are affected, visit the MarketsReformWiki page HERE.

Cryptocurrency SEFs

TeraExchange, which applied to the CFTC for registration as a SEF, was permitted to certify its bitcoin swap contract and list it for trading in 2014. TeraExchange was registered permanently on May 26, 2016. It was the first regulated platform for trading bitcoin derivatives in the U.S.

In August 2015, the CFTC accepted applications from LedgerX to be registered as both a SEF in order to trade bitcoin options and a derivatives clearing organization in order to clear bitcoin options. LedgerX was registered for both trading and clearing physically delivered bitcoin swaps in July 2017.

Seed CX, which was registered to operate as a SEF in 2016, disclosed its intention to list bitcoin and other cryptocurrency swaps as its first SEF products in the first quarter of 2019. However, having never launched SEF trading, the company's SEF registration had become dormant and would need to be reinstated before Seed SEF could operate. In June 2020 the company abandoned its trading aspirations, rebranded itself, and focused on the cryptocurrency transaction settlement business of its subsidiary, Zero Hash.

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. 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 John Lothian News

At SEFCON IV, held in November 2013, John Lothian News interviewed several participants and put together a three-part series on the state of SEFs. Part I, Regulation, was published January 17, 2014.

Open for Business: SEFs Navigate the New Regulatory Environment

Though the final rules are out, the industry is still working on a few lingering issues such as new staff guidance and no-action letters on certain aspects of the rules. Also, as the CFTC begins making classes of swaps “available to trade” and subjecting them to mandatory execution on SEFs, the industry is expected to quickly adjust and comply.