SEFs Extend Reach Beyond U.S.

Terry Flanagan

As U.S.-based swap execution facilities look to expand overseas, they are being confronted with a myriad of regulatory issues, including access, reporting, and cross-border requirements.

Under footnote 88 of the final SEF rules adopted by the Commodity Futures Trading Commission, 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.

“We are required to provide impartial access to the SEF, and at this point in time we are working hard to educate firms about ICAP’s offering,” said Chris Ferreri, head of e-commerce Americas at interdealer broker ICAP. “In general, there hasn’t been a great migration to the SEF order books by the non-traditional clients and that can be seen from the SEF volume reports. Eventually I think the markets will evolve and that there will be broader set of market participants. I think initially the end- user community will gravitate to the RFQ model on the traditional RFQ platforms.”

ICAP has launched i-Swap, its electronic interest rate derivatives platform for trading interest rate swaps in Australia, making Australian Dollar (AUD) the latest currency to be launched on the i-Swap platform alongside Euro, USD and GBP. The launch in Australia is the first for i-Swap in the Southern hemisphere, and the platform is designed to be adaptable to the changing requirements driven by regulatory reform in the Asian markets, according to the company.

ICAP launched Euro IRS on i-Swap in September 2010, Two thirds of ICAP’s 2-year and more than half its 10-year Euro IRS trades are executed electronically through the platform.

Another footnote (195) was clarified by the CFTC to demand that SEFs become a central source of paper ISDA master agreements for non-cleared products executed on their platforms. “The entire industry has raised a concern that the footnote 195 requirement for confirmation is impractical,” Ferreri said.

Ferreri noted that the Dodd-Frank legislation and the resulting rules were written in a static interest rate environment.

“We have had static interest rates now for six years,” he said. “What happens when interest rates really start to go back up? Do the dealers commit capital to that activity? I don’t think anybody should lose sight of the fact that the market structure is reflective of the environment as well. If rates back up dramatically, where does that liquidity come from, an order book? Are you going to see continuous markets when rates are gapping at 30, 40, 50 points? Many of us have been around long enough to remember that.”

Feature image via Artur Marciniec/Dollar Photo Club

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