Swap execution facilities reach the starting line

Fri May 17, 2013 3:27pm EDT

NEW YORK, May 17 (IFR) - After two years of bickering over the construction of swap execution facilities, swaps users and would-be SEFs can finally circle a date on their calendar for when trades will be electronically executed.

With the agency voting the rules into place this week, market participants can home in on early December as the time when all swaps users will be transacting standardised swaps on SEFs.

The exact date is a moving target, depending on when the CFTC publishes rules in the Federal Register. But December 9 is expected by firms such as State Street, which point to the final phase of the clearing mandate on September 9 as the key date.

"When you look at the marketplace four years ago, where swaps trading was all done on telephone off-screen in an unregulated marketplace, now you have to have pre-trade transparency, 94% of swaps will have to be on transparent electronic venues, and even if you use a telephone there are strict requirements in terms of pre-trade transparency," said Jamie Cawley, CEO of soon-to-be SEF Javelin Capital Markets.

"At the end of the day it's a big plus for the marketplace because it's going to enhance liquidity and transparency."

Once the CFTC publishes the rules in the Federal Register, the countdown will begin. Sixty days from that date, likely to be June 1, would-be SEFs are expected to receive provisional registration to execute standardised swaps while the CFTC reviews their applications.

Many participants already clearing, or starting clearing on June 10 as part of the second wave, will be executing on SEFs before December 9, as the CFTC's rules mandate that firms must begin using SEFs 30 days after they begin clearing.

But with the final phase of clearing arriving on September 9, early December is expected to be when two of the biggest changes to the swap market via Dodd-Frank - the electronic execution and clearing of OTC swaps - start operating in tandem.

But it wouldn't be derivatives regulation without some discord. Immediately after the votes were tallied, the Securities Industry and Financial Markets Association voiced its disagreement with the CFTC's minimum-bid requirement and block trade thresholds.

Buysiders will have to request quotes from at least two, and eventually three banks for their customised off-screen swaps. SIFMA believes the rule "will tie the hands of portfolio managers who already have a fiduciary obligation to serve the best interests of their clients," wrote Timothy Cameron, managing director of the industry association's Asset Management Group.

And the Commission remained silent regarding one other key point surrounding SEFs: aggregators. Several technology firms are setting up to aggregate liquidity from the various SEFs that gain market share to serve as a one-stop shop for swaps liquidity. Sources indicate the CFTC will address the issue in the Federal Register release, but details are still unknown.

"It doesn't make sense to call them a SEF because unless there's something strange about their model there wouldn't be any execution on their platform - it would be happening somewhere else," said Elan Mendel, attorney at Shipkevich.

"Until we see what that language says, it's kind of hard to tell what's in store for aggregators."

(This story will be published in the May 18 issue of International Financing Review, a Thomson Reuters publication; www.ifre.com)

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