Asset managers trading on swap execution facilities (SEFs) may face uncertainty over cancelled trades under new CFTC guidelines, a conference heard on Thursday.
The guidelines, released in September to help participants with straight-through-processing (STP) on SEFs require those facilities and designated contract markets to adopt rules that would cancel trades if they are rejected for clearing after execution. The trades would be deemed void ab initio.
Supurna VedBrat, co-head, electronic trading and market structure for asset manager BlackRock, said the potential for cancelled trades could force the buy-side to engage more conservatively on SEFs.
We're very concerned and hope the market finds a solution," she said.
"The unwind of something like this could cause significant operational risk," VedBrat said. "This risk is causing anxiety on the buy-side."
The issue may be somewhat compounded by gaps in STP, suggested Diana Shapiro, fellow panelist and Americas head of OTC derivatives product development and clearing for Citi.
Under the guidelines, futures commission merchants essentially guarantee the clearing of a trade prior to execution, taking on the risk. If proper STP protocols are not in place and the trade falls through, this could lead to counterpart and systemic risk.
SEF trading launched on 2 October and many buy-side firms have engaged in limited participation, largely testing systems and connectivity.
A report from consultancy Greenwich Associates by SEF-watcher Kevin McPortland found an 80% drop off in SEF liquidity between 31 October and 1 November when regulation mandating SEF trading commenced.