Swaps regulation arrives – with a bang and a whimper

The swaps industry has for some time been fixated on October 2nd, the final date for compliance with SEF rules. But really the key date for market participants is when MAT (the “made available to trade” rule) kicks in and that, according to the industry consensus, is not likely to be before February 2014. With many of the 19 new SEFs only submitting their applications this past month, the drama surrounding the birth of this new market structure continues to play out.

Going forward, SEFs will ‘list’ their contracts and, subject to CFTC approval, trades on MAT swaps that fall under the “Required Transactions” classification – that’s most vanilla IRSs and some CDS indices – must transact on SEFs, representing the final decisive break with the bi-lateral past.

In a letter last week the CFTC finally clarified its stance on the legal arrangements among SEFs and their participants (FCMs, dealers and buy-sides), specifically with regard to who guarantees trades, and if trades can be broken. This guidance on the legal certainty of SEF trading focuses on pre-trade credit, with FCMs expected to guarantee their clients’ trades. The onus is on participants to get the credit checking right so that swaps can transact electronically and clear through CCPs. This is, after all, Dodd-Frank’s big vision.

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