Swap execution facilities are set to go live in the US
today with around 20 platforms ready to battle it out for
business in the market for cleared swaps trading,
writes Jonathan Watkins.
Despite calls from market participants and fellow regulators
to delay the compliance date, the Commodity Futures Trading
Commission and its chairman Gary Gensler have been adamant that
the deadline would not be pushed back.
Therefore as of today, Bloomberg, ICE, CME, Icap,
MarketAxess, trueEX, BGC Partners and a handful of other
platforms will begin hosting the venues for the trading and
clearing of swaps, as mandated by the G20 reforms in 2009.
"We’re at the
dawn of a new era in derivatives - this is zero, zero, zero on
the clock and it starts now," said Sunil Hirani, CEO of trueEX,
the new exchange for interest rate swaps.
"In retrospect we will look back on it and say 'this was the
moment in time when fundamental market changes started taking
place in the swaps market’.
The idea behind the Sefs is to reduce systemic risk in the
financial markets by increasing transparency in OTC
Following the financial crisis where swaps were held
partially responsible, the G20 agreement mandated that OTC
products would be forced through clearing to guard against any
defaults from either counterparty.
Sefs were then created and rolled out by the CFTC as the
platforms where regulated swaps trading would then take
First out the blocks
The US watchdog finalised the rules in May after much
deliberation, subsequently leaving aspiring Sef platforms just
four months to compile their applications.
Bloomberg was first out the blocks with its application and
approval, while the other remaining Sefs applicants have been
granted temporary registration in a two-week burst from the US
regulator as the deadline approached.
"As one of the
largest independent swaps trading platforms, operating a Sef
for our clients is a logical progression for Bloomberg," said
Ben Macdonald, Bloomberg's global head of product and president
of Bloomberg Sef, when it was approved.
can continue to execute on our traditional derivative platforms
until the CFTC's mandatory compliance deadline, receiving
approval ensures our readiness to provide them with everything
they need to begin Sef trading on October 2nd."
implementation of Sefs is one of the more meaningful ways the
Dodd-Frank reforms have sought to increase transparency and
standardisation in the swaps market."
| "We risk a fragmentation of liquidity
pools due to the inability of non-US venues to comply
with the US regime, both legally and
operationally," Michel Barnier.
Delay the date
long-awaited arrival of Sefs, there were still calls for the
date to be pushed back.
Michel Barnier, the European Union’s financial
services chief, became the latest to request a delay earlier
this week, saying the US and Europe need more time to reach a
broader agreement on how to apply their respective rules to
"In the absence of such relief, we risk a fragmentation of
liquidity pools due to the inability of non-US venues to comply
with the US regime, both legally and operationally," Barnier
said in a letter to CFTC chairman Gensler.
"We have already witnessed that venues are being forced to
split their offerings into US and non-US trading pools."
received criticism from fellow Commissioner Scott
O’Malia, who said participants would benefit from
a time-limited extension to allow for a smooth transition to
the new execution venues.
Commission wants to foster a robust, competitive landscape for
Sefs, it must be flexible enough to adjust the compliance date
based on market and technology realities, and not stick with an
unworkable date simply to adhere to an individual agenda.
"It was clear from the discussions that market participants
need more time to review Sef rule books and participant
agreements for consistency and legal compliance.
| "We are aware of some issues," CFTC
chairman Gary Gensler.
don’t blame them for being extra careful, given
the fact that Commission staff publicly announced that it is
not going to review Sef applications for substantive
Aware of issues
Gensler commented in September
that the CFTC was aware of problems and recognised the
difficulty for platforms to meet the deadline.
"We are aware
of some issues – whether it is how the pipes are
between Sefs and clearing houses work, and some of the pipes
between Sefs and data repositories work," said Gensler.
"We want to
sort through those things.
"We’re ploughing through 18 SEF applications, but
the truth is that we’re giving them a cursory
"We’re not doing any deep dives."
The issue of
footnote 88 has also posed challenges by extending the types of
contracts which Sefs had to accommodate from a few dozen
products to hundreds.
essentially requires multiple-to-multiple intermediaries for
any CFTC-regulated swap to register as a Sef.
"Another troublesome issue that was brought
up during the TAC meeting involves notorious Footnote 88 in the
Sef final rules," O’Malia added.
require existing multiple-to-multiple swap trading venues to
register as Sefs, even if they only offer products that are not
yet subject to the trade execution mandate.
resulted in venues offering products like non-deliverable
forwards and foreign exchange options to rush to get
registration applications completed on time."
launch date of the Sefs has been paid a large amount of
attention by market participants and regulators but is
unexpected to herald a surge of trading activity on the new
The other alternative of futurised swaps traded on exchanges
was also brought into play by the likes of ICE, CME and Eris
Exchange over the space of the past year.
Despite clearing mandates coming into force throughout 2013,
it was reported that there had not been an explosion of trading
on these platforms to coincide with the compliance dates.
According to industry experts discussion the platforms at
FIA’s Bürgenstock event last week, there will
be no big bang of trading activity on the Sefs on October
Big bang theory
"I think our
type of firms will have a wait and see attitude because
it’s not clear which of these 19 Sefs will be
successful," said Remco Lenterman, managing director, IMC
Financial Markets and chairman FIA European Principal Traders
"There is not
going to be a big bang.
Harrington, global head fixed income trading at Bloomberg, said
he believed there would be trades but not as many in comparison
with the OTC activity currently performed.
"I think we
will be going backwards before going forward," said
is making everyone uncomfortable.
become expensive and market participants are marking less
money, then when you look at the business the liability is
Industry experts have also said that the likeliness of all
20 Sefs succeeding in their ventures is unlikely.
"Because of people’s uncertainties, 'which
venue should I go to?’ There is going to be a
discovery process," said John Wilson, global head of OTC
clearing, prime clearing services at Newedge.
Three keys to succes
The CFTC provided the temporarily registered Sefs and
counterparties a brief additional time period to prepare for
data reporting of some derivatives transactions, earlier this
week amid concerns over duplication as multiple parties submit
On boarding of buy-side
participants has also been delayed for a month.
reporting of foreign exchange swap reporting will also be put
back to the end of October, while reporting for equity and
commodity contracts will now not be formally implemented until
said that SEFs may report directly to SDRs or use a third party
to do so, but recognised that even with help SEFs may not be
able to fulfil all of their obligations.
there were some extensions on the reporting side, Gensler did
not shift the compliance date for the Sefs despite the market
pressure, meaning from today the new era of swaps trading has
trueEX chief executive, Hirani, explained that the success
of a Sef will come down to three things.
"Differentiated service in the products, liquidity and
buy-side involvement - those are the three criteria," said
"This market has been more or less functioning the same way
for decades in IRS, so it’s not surprising that
there should be a lot of consternation and changes."