Swap execution facilities (SEFs) were given life by the Dodd-Frank Act, which requires over-the counter (OTC) swaps to be cleared and traded on this new type of regulated platform. The CFTC published its final SEF rules in mid-2013 and trading has commenced on 18 registered SEFs. John Lothian News interviewed a dozen of the leading SEF operators, regulators and other participants and put together a three part series on SEF regulation, the changing market structure and the new technology required to make it all happen.
Part I looks at the state of SEF regulation. Though the final rules have been in place since May 2013, the industry is still working on a few lingering issues such as new staff guidance and no-action letters on certain aspects of the rules. Also, as the CFTC begins making classes of swaps “available to trade” and subjecting them to mandatory execution on SEFs, the industry is expected to quickly adjust and comply.
In short, there are still plenty of regulatory and compliance issues. According to CFTC Commissioner Scott O’Malia, SEF participants must contend with a “blizzard” of new interpretations from the commission. “Since September 26, we have 13 new staff guidance, direction or no-action letters that people are trying to assimilate into their trading protocols.”
For example, a November 2013 advisory says that if a U.S. affiliate performs, “core, front-office functions,” it must register. This was considered an “add-on” to the cross-border guidance put out by the commission in the summer of 2013. In January 2014 the commission revisited the issue by putting out a request for comment on the advisory, as signal that the issue may be revisited.
Another source of controversy for SEFs was Footnote 88, which expanded the scope of final SEF rules to include certain bilateral execution platforms that were previously thought to be exempt.
On January 16, 2014, the CFTC released its first determination of which swaps will be “made available to trade,” subjecting them to mandatory execution on SEFs beginning February 15, 2014. Although SEFs are “open for business,” until the rules are fully implemented, the full effect of the new regulatory regime will remain uncertain.
In the words of Scott Fitzpatrick of SEF operator Tradition, “we’ve all done a really good job up to this point, but we’re not over the line yet.”