The WMBA Americas hosted SEFCON V on November 12, 2014, and John Lothian News was there. We interviewed 14 SEF operators, regulators and participants and put together this three part series on the state of SEFs one year into the mandate. Part II looks at the differences between U.S. SEF rules and those of other jurisdictions.

When G-20’s finance ministers met in Pittsburgh in 2009, a global consensus was reached on the principles for regulatory reform. As reform progressed, however, clear differences became apparent between philosophies emerged, specifically between the U.S. and the E.U. on the reach and scope of regulations. The 2013 “Path Forward” between the CFTC and the EU was to usher in a new era of cross-border harmony, but 2014 would shape up to be a year not of harmony, but of frustration, with a market that is, in the words of ISDA CEO Scott O’Malia, “in fragmentation, with liquidity fractured between European and U.S. markets.”

“Bifurcation has happened, for sure,” says Scott Fitzpatrick, CEO of Tradition’s SEF.

An attempt was made earlier in the year to reunite liquidity pools by allowing U.S. SEFs a special designation called a “qualifying multilateral trading facility”, or QMTF, but the initiative proved to be a failure. Was the QMTF, as one panelist put it, a result of “disingenuous negotiations between the UK Financial Conduct Authority and the CFTC?”

According to BGC Partners‘ Jeff Hogan, “the positions between those two entities widened rather than narrowed due to the QMTF creation of a dual recognition of platforms.”

“The question on substituted compliance is in the details,” says WMBA CEO Alex McDonald. “Whose rules may apply when, and can you also substitute money laundering, participation, trade reporting, in addition to the current news story, which is the recognition of CCPs?”

“To borrow a phrase from Churchill,” says BGC’s James Cawley, “this is not the beginning of the end, but is certainly the end of the beginning.”


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