Finalising swap execution facility (SEF) documentation is the chief impediment to onboarding buy-side firms as the expected February mandatory trading deadline approaches, according to SEF operators.
Grigorios Reppas, credit default swap product manager for already-launched MarketAxess SEF, said despite trading beginning in October, many asset managers continue to struggle with the three key documents needed to trade swaps on a SEF.
Participants must sign-off on the SEF user licence agreement, which makes firms liable to Commodity Futures Trading Commission (CFTC) rules, the SEF rulebook and the clearing agreement, before they can trade swaps on the new platforms.
“Documentation is the number one barrier to buy-side firms trading on SEFs,” Reppas told theTRADEnews.com. “Particpants are swamped with documents to review before the [expected February] mandated trading begins and we’re trying to get asset managers ready for this.”
MarketAxess has between 300-400 buy-side firms ready to trade on its SEF, nearly a third of the 1,300 participants active on its platform for cash products.
The key difficulty in buy-side firms signing off on these documents relates to understanding the content, which in respect to the SEF rulebook, is not a static text.
“The SEF rulebook is a dynamically changing document, and each change needs to be signed off by the CFTC, with a ten-day grace period,” he said. Recent changes have related to the CFTC’s open access requirements.
Despite fielding a high volume of buy-side calls regarding this issue, Reppas said helping the buy-side process these documents was simply a function SEFs must absorb to migrate asset managers and hedge funds to electronic swaps trading.
Despite the pressure to finalise documentation, however, Leonard Nuara, president and COO of soon-to-be-launched SEF TeraExchange, believes the documentation itself is straightforward, but the changing role the buy-side must adapt to is impeding firms from SEF trading.
“The documentation across the SEFs that have temporary registration is very similar,” he said.
“The real issue is the buy-side must take on greater responsibility with these user agreements, so firms must get used to this change in practice of being subject to CFTC rules directly,” Nuara said.
Nuara said TeraExchange had under 100 participants that had fully completed the documentation needed to trade on its SEF, and was waiting on consensus from its largest participants to begin trading. He said this may occur before next year, but would likely begin in January.
Market participants will have to trade a great number of swaps on SEFs from February, when the CFTC is expected to deliver its final decisions on crucial ‘made available to trade’ submissions, which will mandate SEF trading in those instruments. Currently four SEFs have submitted such applications.
The volume of SEF-related paperwork has compounded the difficulty in buy-side firms adapting to the new environment of electronic swaps trading, according to Barry Smith, director of global exchanges and trading venues at data centre operator Equinix.
“The biggest issue for the buy-side is the sheer amount of paperwork involved in connecting to each SEF,” he told theTRADEnews.com. “You’ve got 21 SEFs and for each one you need to fill out three different pieces of documentation.”
“Connectivity from a technology perspective isn’t actually a major barrier because the costs of this have come down considerably in recent years,” he said.