SEFs Face June 16 Trading Deadline

Terry Flanagan

Operators of swap execution facilities are gearing up for handling swaps transactions consisting of multiple swaps, known as packaged transactions.

The Commodity Futures Trading Commission has set a deadline of June 16 for the expiration of no-action relief on mandating packaged transactions in which the swap components have been made available to trade and are subject to the trade execution requirement, and all other components are U.S. Treasury securities (U.S. Dollar Swap Spreads).

The first tranche of the CFTC no-action relief expired on May 16, making curve and butterfly trades mandated.

“The most important part of the no-action relief for Icap is going to be the last tranche, starting on June 16, when spread over Treasuries are going to be mandated,” Laurent Paulhac, CEO of the Icap SEF, told Markets Media. “Packaged trades are definitely a significant part of our business, and it is a large part of the overall interest rate swap market. From that point on, the vast majority of the interest swap market will be subject to mandatory trade execution requirements.”

Icap’s recently-launched UK subsidiary, ICAP Global Derivatives Limited (IGDL), is a global SEF and Multilateral Trading Facility (MTF), regulated by both the CFTC and the UK Financial Conduct Authority (FCA). In conjunction with the launch, Icap has rolled out a new voice Request for Quote (RFQ) protocol, vRFQ2.0, which is designed to be in compliance with global swap execution regulations.

“Regulatory compliance is extremely important to Icap. As a result, we’ve done a full review of how we effectively facilitate transactions in our voice business to ensure we are fully compliant,” Paulhac said. “Voice execution is allowed under the CFTC rules. Our analysis showed that ‘business as usual’ for voice execution would not satisfy the CFTC rules.”

Icap designed a new protocol largely anchored in historical market practices but re-engineered to be compliant with today’s regulations.

“We call this new service vRFQ2.0, and it’s a fully CFTC and FCA compliant execution protocol,” Paulhac said. “We’ve started a broad education campaign with all our clients about our focus on compliance and the roll out of vRFQ2.0 for all mandated swaps. We have rolled out new technology, systems and process engineering to facilitate vRFQ2.0 in a fully integrated fashion with our electronic platform, i-Swap. Those are the necessary investments to provide full compliance with the new regulatory framework.”

He added, “Starting on June 16, ‘business as usual’ for swaps voice execution is over.”

Peter Best, chief operating officer of the Icap SEF, said in a statement: “With mandatory swaps trading now a requirement for many market participants across multiple asset classes, Icap is committed to offering its customers market-leading execution solutions that manage their swap risk in a fully compliant manner.”

The G20 reforms are pushing over-the-counter markets towards exchanges and clearinghouses. In the U.S., rules require clearing for certain types of interest rate swaps and credit default swaps.

It is estimated that more than 80% of the interest rate swaps market is now being cleared, according to Walt Lukken, president and CEO of the Futures Industry Association. In addition to clearing, the CFTC has mandated that these products be traded on exchange-like platforms called SEFs, moving away from the traditional dealer markets that have dominated the execution of these products.

“This transition has been relatively slow up to now, but over time I expect that a larger share of these markets will migrate to the exchange model of trading,” Lukken said in a May 28 speech at the Shanghai Derivatives Market Forum.

The same trend is happening in Europe, said Lukken, where mandatory clearing will start in Europe by end of this year, and mandatory trading sometime thereafter. Similar changes are taking place in other parts of the world, notably Australia, Canada, Hong Kong, Japan, and Singapore.

Featured image via Orlando Florin Ros/Dollar Photo Club

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