Time to get comfortable with SEFs

The CFTC’s 29th meeting on Dodd-Frank rules, held in Washington, D.C. on May 16th, has been widely covered in the financial press. Final SEF (Swap Execution Facility) rules – including the so-called “Made Available to Trade” (MAT) rule – and minimum block sizes for swaps (among other rules) were approved by the Commission.

Despite controversy, it’s now clear that electronic trading of swaps will progress. In one example of compromise, the required minimum number of RFQs for trading swaps is now set at three (with two RFQs mandated until mid-2014); proposed alternatives had ranged from zero or one to five.

The Commission has reiterated the commitment to transparency and openness in swaps trading envisioned by the Dodd-Frank Act, enumerating that SEFs need to “provide impartial access to their markets to any eligible contract participant and any independent software vendor.” The CFTC has also tried to remain flexible as to trading mechanisms. Alluding to the “any means of interstate commerce” language in the Act, Chairman Gensler acknowledged that SEFs could use voice trading.

Unlike the vertical futures model, where exchanges and clearing houses own the intellectual property (the actual contract specification and the open interest), SEFs can and will list the same contract: “once a swap is approved or deemed certified as available to trade, then all other DCMs (Designated Contract Markets) and SEFs that list or offer that swap for trading must do so in accordance with the trade execution requirement”.

Taking into account this “impartial access” model, as well as the implied mechanics of the MAT rule, one quickly concludes the swaps market structure will change profoundly, with numerous SEF entrants, as well as other players, converging in the electronic trading ecosystem.

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