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 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 II looks at the changes to the overall market structure brought about by new regulation. Though the swap execution facility is a new entity as defined by Dodd-Frank, an ecosystem of platforms and processes for the trading OTC derivatives has been in place for decades. The introduction of new requirements for quoting, clearing and data transmission significantly altered the competitive landscape among inter-dealer brokerage firms (IDBs) and dealer-to-client platforms.
“The SEF definition is about 50 words,” says Chris Ferreri, managing director at ICAP, “that resulted in, just for the CFTC so far, a 511 page document with 1250 footnotes, to define those 50 words.” The rules have not only required a revamp of policies and procedures among existing firms, they have also opened up opportunities for new platforms, service and software providers.
When SEFs officially opened for business in 2013, 18 firms submitted applications. Will there be enough room for them all? Though the notional value of daily swap trades is a rather large number, according to Tullett Prebon’s Shawn Bernardo, “the number of trades is not as great as everyone thinks. To have 18 SEFs survive – I don’t think that is possible.”
As the SEF rules move through the implementation phase and more products become subject to mandatory execution on SEFs, the competitive environment will continue to evolve. New players will compete with established players for market share but, in the end, service and liquidity will be the keys to competition in the new market structure.