11.06.2013
By Terry Flanagan

Futures Exchange Awaits SEC Guidance

OneChicago, an exchange that trades single-stock futures, is awaiting guidance from the Securities and Exchange Commission that would essentially give a green light to equity swaps trading on exchanges or swap execution facilities (SEFs).

The SEC has been tasked with overseeing security-based swaps under provisions of the Dodd-Frank Act, which requires most swaps to be executed on exchanges or SEFs and centrally cleared. Most of the SEFs that have been approved by the Commodity Futures Trading Commission trade interest-rate swaps or credit-default swaps.

“We are waiting for the SEC to give guidance on the date that equity swaps have to begin to either trade on an exchange or a SEF,” said David Downey, chief executive of OneChicago. “Participants, if they trade on an exchange or SEF, will be subject to both exchange and clearing fees, as well as connection costs. All those costs are frictions on doing a trade.”

David Downey, OneChicago

David Downey, OneChicago

OneChicago has stated in comment letters that venues that trade OTC products should be subject to the same requirements as exchange-traded instruments.

Earlier this year, the SEC issued guidance explaining that a SSF has the same risk profile as a share of stock. “This means that they relatively expensive stock positions can be exchanged for an SSF via n EFP [exchange of futures for physical] transaction,” Downey said.

An EFP is a combination order to sell (buy) an amount of stock and simultaneously buy (sell) a proportionate number of SSFs. “An EFP is the equivalent of securities lending, without the added costs,” said Downey. “We are providing an exchange-traded, centrally-cleared, Dodd-Frank-compliant derivative product that is simply a legally binding agreement that holds two parties to a discipline of mark to market, which is what a swap is. Both parties will have the added benefit of removing their current positions from their balance sheets without changing their market position, as SSF are off-balance sheet items.”

Securities lending is primarily a back-office function that effectively is an over-the-counter derivative transaction. “Securities lending is currently an operations function,” Downey said. “However it should be viewed as a trading strategy and therefore be included in the investment manager’s responsibility. There are substantial profits being ceded to intermediaries that could accrue to the funds and their clients instead.”

OneChicago is the only U.S. equity finance exchange for trading security futures and the related EFP. Contracts are cleared through the Options Clearing Corp. (OCC)

“OneChicago is a growing equity finance exchange operating in an evolving regulatory landscape, and I’m looking forward to helping the firm navigate those changes while continuing to maintain its regulatory and compliance efforts,” said Waseem Barazi, who was recently appointed chief regulatory officer at OneChicago. “As derivatives transactions increasingly move from the OTC space to exchanges like OneChicago as a result of Dodd-Frank, it is imperative that we uphold the principles of transparency and regulatory compliance our customers seek when utilizing our exchange-traded futures products.”

Barazi serves as the exchange’s primary liaison to the Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission (SEC).

Barazi, who had previously been Director of Market Regulation, first joined OneChicago in 2011, providing legal research and analysis regarding the exchange’s regulatory and compliance functions “We are thrilled to be able to name Waseem to this position,” said Downey. “While Waseem brings an extremely high intellect and a background in law and compliance, it is his self-propelled personality and understanding of technology that makes him ideally suited to this new job.”

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