SEFs Dominate OTC Discussion

Terry Flanagan

SEFs, trade repositories, central clearing, collateral—the list of issues confronting the OTC derivatives industry is a long one. Four years after the G-20 nations agreed to adopt reforms to make the multi-trillion dollar swaps markets more transparent, the arduous rulemaking process is coming down the home stretch.

In early 2014, most interest rate and credit derivatives products will be required to trade on an exchange or a SEF, which under the Dodd-Frank Act are required to maintain an order book and to expose a swaps transaction to multiple bids and offers, using either a request for quote or a central limit order book.

As of November 1, 2013, a total of 280 Dodd-Frank rulemaking requirement deadlines have passed, which is 70.4% of the 398 total rulemaking requirements, and 100% of the 280 rulemaking requirements with specified deadlines, according to the Davis Polk Dodd-Frank Progress Report.

Of the 398 rulemaking requirements, 162 (40.7%) have been met with finalized rules and rules have been proposed that would meet 121 (30.4%) more. Rules have not yet been proposed to meet 115 (28.9%) rulemaking requirements.

Most recently, the Commodity Futures Trading Commission on Tuesday voted to re-propose a rule on position limits in accordance with the Dodd-Frank Act, after a district court vacated the original rule which had been passed in 2011 but was challenged by the International Swaps and Derivatives Association and Sifma.

The CFTC ruled, via Footnote 88 in its final swap core requirements, that permitted transactions (transactions that are not subject to mandatory clearing) must be traded on a SEF along with required transactions (those that are subject to mandatory clearing), as long as the platform on which they’re traded is multi-dealer.

That vastly increases the number of swap transactions, and therefore the complexity, associated with reporting to SDRs and CCPs.

“The biggest issue right now is uncertainty,” said Chris Ferreri, managing director at interdealer broker Icap. “For example, there are three footnotes in the final SEF rules which created uncertainty. One is Footnote 88, which affects all OTC instruments, not just those that have been Made Available to Trade. Footnote 195 concerns trade reporting, and Footnote 513 deals with cross-border issues. If you think of the SEF as a hub, there is much confusion created by the fact that not all SEFs are handling the rules the same way.”

SEFCON IV gets underway November 18. “We’re very excited to again bring together industry leaders, legislators, and regulators to discuss these important and timely issues, which are the biggest changes in the history of the OTC markets,” said Ferreri, WMBAA Member and Event Chair. “As with previous SEFCON conferences, attendees will be able to hear insight specific to the OTC industry and which only the SEFCON conference has — I encourage everyone in the space to attend.”

A multilateral trading platform that provides persons located in the U.S. with the ability to trade or execute swaps on the platform’s market (either directly or indirectly through an intermediary), should register, said CFTC chairman Gary Gensler at the FIA conference in Chicago.

“Registration applies whether those persons are U.S. persons or non-U.S. persons whose personnel or agents are located in the U.S., regardless of the location where the swap is ultimately booked,” he said.

This includes circumstances where a swap dealer arranges, negotiates, or executes the terms of a swap in a non-U.S. branch, but trades swaps on a multilateral swaps trading platform using personnel or agents of the swap dealer located in the U.S.

“We at Icap have taken the cautious view that a trade executed offshore between a non-U.S. person and a person who is physically located in the U.S. will be captured by the SEF trading rules, which Chairman Gensler reiterated during his keynote address at FIA,” said Ferreri.

This will trigger some SEF registrations for foreign-based platforms that are already registered with their home country. For instance, one Australian platform is going to register with the CFTC, Gensler said.

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