The Swap Execution Facility was given life by the Dodd-Frank Act. After three years of meetings, rule proposals comments, and more meetings, the final SEF rules were published by the CFTC in mid-2013 and trading has commenced on 18 registered SEFs.
John Lothian News attended SEFCON IV and interviewed a dozen of the leading SEF operators, regulators and other participants to bring you this three part series on SEF regulation, the changing market structure and the new technology required to make it all happen.
Part three of the series explores the importance of technology in the rapidly changing SEF landscape. Mandatory execution on SEFs, along with clearing and data mandates, have necessitated a technology transformation in financial markets. While most of the pieces are in place, several questions remain.
“I’m frequently reminded that these are swap execution facilities, but really they are technology companies,” says CFTC Commissioner Scott O’Malia. “They really have developed a resilience and flexibility to adapt to all of the technological requirements we have thrown at them.”
A major challenge for SEFs in order to comply with new regulations is the issue of pre-trade certainty of clearing. New technology needed to either be created or adapted to ensure trades agreed to on a SEF can indeed be accepted for clearing. Several solutions have been proposed and created, such credit hubs that can be queried as a trade occurs (the “ping” model), credit limit lists that can be sent out from futures commission merchants (the “push” model), or direct credit checks with individual dealers (the “pull” model). “There is not consensus yet on which model will ultimately make the most sense, so we are supporting all three,” said Rick McVey, CEO of MarketAxess, which operates one of the 18 approved SEFs.
Prior to Dodd-Frank, OTC markets were already in a transformational phase, as the industry slowly transitioned from voice execution to electronic quoting systems. The final rules, which allow for execution “by any means of interstate commerce,” keep voice execution viable, but also require posted order books and open access among participants. According to Shawn Bernardo, head of Tullett Prebon’s SEF, “different SEFs are taking different approaches” regarding the next phase.
There is bullish consensus on one thing, at least – complexity. “The number of boxes and arrows on the workflow diagrams is up 300 percent year-on-year,” says Traiana’s Nick Solinger.” It’s almost mind boggling.”