In less than two weeks, the CFTC will require compliance with its final rules regarding swap execution facilities (SEFs), and there is concern among industry participants that the budding SEF world is not ready. We believe these concerns are real enough and the risks great enough to warrant a two-month extension to allow SEFs and their customers time to complete registration process, digest the thousands of pages of SEF applications, and complete additional system checks.
Rules surrounding SEFs, given life by the Dodd-Frank Act, were among the first to be proposed by the commission in December 2010. Yet it would be nearly 2 1/2 years before the final rules became effective in August 2013. After being told to “hurry up and wait” from late 2010 until last month, SEFs are now being told to hurry up again.
What’s the big deal, you ask? Why can’t we just flip the switch and go?
First, there is simply too much information to digest in such a short time. The commission only began accepting applications last month and, as of this week, has only granted temporary registration to seven of the 18 applications it has received. Each application is filled with hundreds of pages of rule books and addenda, additional disclosures and exhibits that must be sorted, vetted and compared to other platforms. Can SEF customers really perform adequate due diligence on multiple platforms in this amount of time?
Second, while the final rules are similar to the proposed rules in most respects, there are a few notable changes. The most famous is Footnote 88, which is viewed by many as a game-changer. Under this provision (which was not even in the actual text of the rule, but rather buried in the footnotes), any platform offering aggregation to multiple participants (a “many-to-many” platform), must register as a SEF even if the platform has no intention of offering swaps subject to the trade execution requirement in Dodd-Frank. This eleventh-hour change has been a shock not only to some niche platforms such as FX-only SEFs, but also to some foreign platforms who deal with U.S. persons.
Potentially worst of all, though, is that the technology, specifically that surrounding pre-trade credit checks, may not be fully operational. Technology glitches seem to be all the rage these days, and while no single cause stands out as the reason behind them, many have been related to the implementation of new systems.
From debates regarding margin requirements, the encouragement of “futurized” swaps in energy and interest rate markets, and a forced migration to electronic execution, the would-be SEFs have felt as though they have been behind the 8-ball since the beginning of the rulemaking process. The last thing they need right now is a technology meltdown.
In the grand scheme of things, a 60-day delay is meaningless compared to the potential fallout from a premature rollout. We would hope that the October 2 deadline is not about talking points, securing a legacy by a certain date, or some other politically-motivated reason. The overriding concern must be for the safety of customers and providers, and the overall integrity of the market. After being told to hurry up, wait, and hurry up again, how about we wait just a bit longer?