The absence of harmonised cross-border rules is just one of
a number of problems facing operators and users of swap execution facilities
(SEFs) when mandated trading begins, a report from research consultancy Aite
So far, only the UK has formally recognised SEFs, while
Europe and Asia lag well behind the US in developing and implementing G-20 post-crisis
reforms, which include pushing OTC derivatives markets onto electronic
platforms. This may encourage non-US
entities to avoid trading on SEFs and US-headquartered firms to direct swaps
activity through foreign subsidiaries to maintain bilateral trading in the
The UK has implemented an equivalency agreement with the US recognising
SEFs and enabling trading between US and UK participants on SEFs, but Europe is
yet to formalise recognisition of SEFs.
SEFs were created in the Dodd-Frank Act and are the US embodiment
of G-20 measures to reduce the opacity of OTC derivatives markets by forcing
trading onto exchange-like platforms. Rules governing Europe's SEF equivalent, the
organised trading facility, are yet to be finalised but will be created within
the region’s MiFID II regulatory framework.
necessary these regulatory mandates may be, they are the polar opposites of
organic market development and have the potential to drastically disrupt global
OTC markets, both in the current transition period and post-implementation,”
the report, authored by David Weiss, senior analyst for Aite, states, adding, “SEF
success is far from assured at this point.”
implementation could drive global swaps business back towards bilateral
trading, albeit for a short period of time, which could disrupt markets, Weiss
created by the Commodity Futures Trading Commission’s (CFTC) ‘made available to
trade’ (MAT) rule that will act as the de facto mandatory trading deadline and
prolonged inaction on the part of the Securities and Exchange Commission, which
is responsible for securities-based OTC derivatives, could result in dire
outcomes for the global market, he adds.
rule lets SEFs propose which products are classed as available to trade. Once
the CFTC approves MAT applications, the instruments in question must be traded
on a SEF instead of bilaterally traded. So far, this has resulted in fears of a
‘race to the bottom’ as SEFs attempting to gain liquidity will make available
for trading the most illiquid products.
adds that the MAT rule has also forced SEFs to choose between protecting customers
by not putting forward onerous MAT submissions and losing out to other SEFs
willing to trade less-liquid products.
SEFs themselves, especially those derived from existing business and platforms,
must walk a fine line so as not to alienate their existing customers and
prospects, which could diminish overall liquidity on their SEF,” Weiss wrote in