Keeping SEF doors open

The CFTC has come out strongly in defence of the open, impartial nature of SEFs, as envisioned by Dodd-Frank. In a letter issued last Thursday it warns SEFs not to use “enablement mechanisms” to control access to their markets, or to control which participants interact with one another on their platforms. It also warns against engaging in “prohibited discriminatory treatment”.

The Commission had already tried to clarify trading and clearing certainty in its STP guidance, but this recent letter goes much further. It discusses both market structure and the need to ensure access for eligible contract participants and ISVs, as well as for dealers and FCMs. In trying to preserve the unique nature of the swaps market both Dodd-Frank and the CFTC’s final SEF rules allow for a hybrid market structure, specifying only that SEFs have an “order book”, as well as RFQ to two participants (going to 3 later in 2014). This loose, hybrid approach allowed SEFs wide latitude in how they structured access to, and interaction on, their electronic platforms. The Commission has now forcefully articulated how it expects this market structure to work in practice, emphasizing fairness, impartiality and transparency.

Whether or not this implies that truly anonymous central limit order books come to the fore, it certainly opens up the market further. And, as the Commission continues to articulate the role of the FCM and a kind of ‘customer protection’ on swaps execution, it suggests the emergence of an effective agency model in the not too distant future.

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