CFTC Seeks Smooth Transition to SEFs

Terry Flanagan

The Commodity Futures Trading Commission is taking steps to ensure a smooth transition to mandatory swaps trading on SEFS, scheduled to begin on February 18.

“As a result of the trade execution mandate, next week many swaps for the first time will trade on regulated platforms and benefit from market-wide, pre-trade transparency,” said CFTC acting chairman Mark Wetjen. “These measures, in conjunction with the Commission’s implementation of the trade execution mandate, will maximize the level of trading on these regulated platforms and support the transition to a transparent, risk-reducing swap-market structure under CFTC oversight.”

Wetjen added, “These platforms promise to improve pricing for the buy-side, commercial end-users, and other participants and add to liquidity by streamlining participation in the swap markets.”

The swaps industry is focused on SEFs going live for mandatory trading. Feb. 18 is the first business day for select on-the-run plain-vanilla rates products and Feb. 26 is the first day for credit, select 5 year on the runs.

The industry has been spending the past couple of months on the legal documentation, rulebooks review, and the on-boarding and electronic connectivity between SEFs, vendor platforms, FCMs, middleware providers, and credit limit hubs.

“It’s been an interesting couple of months, scrambling to ensure operational readiness so trading can continue in a business as usual yet entirely different fashion,” said a risk management executive at a large institutional asset management company. “A lot of people have done electronic trading of swaps in the past, but the requirement to transact electronically will be a new experience for many market participants.”

In connection with the commencement of the trading mandate, the CFTC has taken several measures. In order to protect the identities of counterparties trading on SEFs and incentivize anonymous trading on regulated platforms, the Commission on February 10 issued an interim final rule clarifying that a party to an anonymous trade executed on a SEF or designated contract market (DCM) cannot access information in swap data repositories in order to obtain the identity of its counterparty.

The Commission also published guidance on clarifying that while market participants trading on a SEF consent to its jurisdiction, it is a such consent need not be obtained through an affirmative writing. Rather, a SEF may comply with this requirement by providing in its rulebook that any person initiating or executing a transaction on or subject to the rules of the SEF directly or through an intermediary consents to the jurisdiction of the SEF.

Companies have been doing their due diligence on which SEFs to partner with, the executive said. “People who have historically done swaps electronically continue to do them but in less volume. However, if they are trading select points on the rates curve or the on the run credit indices which will be required, they will have to move their volume back to electronic venues like SEFs.”

The biggest impact is likely to be on firms that have not historically utilized electronic platforms.
“Many derivatives users are most interested in seeing the impact of swaps trading being mandatory on swaps liquidity,” said the executive. “It will be curious to see if there is less liquidity because dealers are making wider markets as they feel out the electronic landscape. If you’re a dealer who has been making markets on the phone, then they have known for months if not years that they would eventually have to start doing that on an electronic platform, so hopefully the mandate will not prove too disruptive, if at all, to the market.”

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