Operators of swap execution facilities (SEFs) in the US are seeking to leverage operations ahead of final rules for equivalent platforms in Europe, as preparations for the new world order of OTC derivatives trading intensifies.
Intercontinental Exchange (ICE) has announced it is registering an multilateral trading facility (MTF) in Europe at the same time as registering to operate a SEF.
The markets operator hopes that by launching an MTF now, it will gain a head start when Europe introduces SEF-like platform to facilitate swaps trading know as organised trading facilities (OTFs).
Chris McEntree, director of corporate development at ICE, said: “While regulation has been lagging in Europe compared to the US, we’re registering as an MTF with the same ICE Swap Trade branding as our SEF, and begin operating this within the European regulatory environment so we can start to get ready for the changes in Europe.”
However, the Wholesale Markets Brokers’ Association’s (WMBA) chairman, David Clark, was doubtful over whether US firms operating SEFs would gain a significant advantage when OTFs launch.
“Right now there is little evidence that OTFs will be significantly SEF-like. Decisive trialogues will take place in Brussels and it is unlikely that OTFs will be a direct read-over of the US legislation surrounding SEFs,” he said.
Aside from branding and regulation, ICE also said it will be able to learn from its experiences in operating the technology behind a SEF and be able to leverage this when OTFs arrive.
McEntree adds: “By launching ICE Swap Trade as a SEF and also an MTF, we will be able to start setting up and tuning the infrastructure behind that in order to be ready for when European regulation catches up.”
Both OTFs and SEFs are intended to facilitate the trading of OTC derivatives electronically and multilaterally. However, there are key differences between the two, with OTFs also potentially enabling the trade not just swaps, but equities, commodities and other derivatives contracts.
“US legislation is a long way ahead of the EU but already we can see that OTFs and SEFs are not the same. For example, OTFs will contain products that will be traded both OTC and those mandated into clearing. I don’t think that operating a SEF will automatically mean you are ready to start running an OTF,” said Clark.
While ICE is looking to extend its SEF development into Europe, some European firms are also looking to launch SEFs in the US, though this has received little attention due to the Commodities and Futures Trading Commission failing to specify whether the rules were limited to US businesses. Even the Commission’s SEF application form does not ask which country a firm is based in, presuming they will be domiciled in the US.
One such firm is France-based RFQ Hub, which is planning to run a SEF. Its CEO, David Sagnier, said: “We spoke to the CFTC and they confirmed that non-US companies can register as a SEF. They also agreed that we would not need to open a US branch in order to apply.”
Including ICE, so far 10 firms have applied to operate SEFs, with Bloomberg being the first to receive provisional authorisation from the CFTC. Final European regulation on OTFs is not expected until 2014 but could be pushed back to 2015 or later, according to market experts.