In this morning’s John Lothian Newsletter, John commented upon the defection of Laurent Paulhac from his role as head of OTC products at CME Group to ICAP, where he will be CEO of the inter-dealer broker’s swap execution facility, by saying “the SEF world just got more cut-throat.”

Actually, it has been cut-throat since day one. The SEFs have been fighting a war on three separate fronts. First, the regulators, beginning with Dodd-Frank and culminating with the CFTC’s final SEF rules, creates what the brokers called an unlevel playing field. From forced electronification, higher margin requirements and specific quoting requirements, to the two-year delay between proposal and finalization of the rules, the SEFs have been forced behind the proverbial eight-ball.

The extra head start and margin treatment has allowed exchanges to “futurize” certain swap products, specifically those in energy and interest rates. So now the SEFs are scrambling to keep their customers in-house, by offering execution quality of bespoke transactions, and offering their own versions of exchange-like products.

Finally, the SEFs have been battling with the bank dealers, who would also like to keep their platforms in the status quo. The so-called “Footnote 88” may force many-to-many dealer platforms to register even if they limit their offerings to products outside the mandate, but give relief to single-dealer platforms. Now we hear that another potential loophole, “Footnote 513” may allow foreign affiliates to sidestep regulations – the dreaded “regulatory arbitrage” we have all been hearing about since the passage of Dodd-Frank in 2010.

But I would not count these guys out. The IDB community is a massive infrastructure, and much of this structure cannot be shoehorned into the futures model. Loopholes were not within the spirit of Dodd-Frank, so these things should disappear in short order.

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