The first hurdle for swap execution facilities took place last year, when the Commodity Futures Trading Commission issued its rules for SEFs, and SEF registration became mandatory as of November 2, following a one-month delay.
Now. with the expectation that most interest rate and credit derivative products will be required to trade on either a swap execution facility or an exchange in February, SEFs have been building out the nuts and bolts to support the multitrillion dollar market, such as trading systems, connections to CCPs and swap data repositories, and credit risk checks.
“As the February deadline for SEF execution approaches, many firms are asking the question, which SEFs should I connect to?” said Paul Gibson, business consultant at Sapient Global Markets, and Jim Myers, senior manager, business consulting TRM at Sapient Global Markets, in e-mailed comments to Markets Media.
The CFTC ruled, via Footnote 88 in its final swap core requirements, that permitted transactions (transactions that are not subject to mandatory clearing) must be traded on a SEF along with required transactions (those that are subject to mandatory clearing), as long as the platform on which they’re traded is multi-dealer.
That vastly increases the number of swap transactions, and therefore the complexity, associated with reporting to SDRs and CCPs, catching the SEF industry off guard.
With a number of options out there that seem similar, some firms are considering a single platform which offers one screen to look at different SEFs with the same offering (e.g. interest rate swaps) and compare pricing across the entire SEF market.
"While there are market development, collateral and margin issues – the concept of 'SEF aggregators' is gaining attention," said Gibson and Myers.
In the front office, SEF aggregators can help provide standardized execution, minimizing system changes that would otherwise need to be made to buy-side systems for trading, sell-side systems for trading, technology for the SEF itself, and all the supporting systems.
However, SEF aggregators fall short in helping with key legal, operational, and technology challenges. “Swaps providers are struggling to try to navigate all of the rule books (as every SEF has its own rule book) that are being constantly revised,” said Gibson and Myers. “Those legal interpretations will then impact operations and technology. Before February 15, firms will still need to conduct a full legal review and gather feedback from the business to understand operating procedures that need to change as trading becomes mandatory.”
They continued, “As banks and FCMs look to fill these operational and technology gaps before February 15 and make sense of the SEF world for their clients, it is of primary importance to understand what business processes and systems they have in place and identify and address needs based on gaps in technology and process. As the SEF market matures, banks and FCMs will need to develop, deploy or connect to systems that help with price aggregation across SEFs if they intend to maintain relevance in the altered OTC marketplace.”
