Buy-side firms urged to identify preferred SEFs quickly
Buy-side (and sell-side) institutions trading swaps need to identify quickly which swap execution facilities (SEFs) they want to use to enable them to continue executing swap transactions once Dodd-Frank is enacted.
“A lot of financial institutions are behind the curve in their preparations. The CFTC has only just announced what constitutes a swap and even that is open to further debate. The CFTC has given financial institutions 60 days to comply with the new rules although I expect the provisions around SEFs will be pushed back, possibly to January 2013,” said Bradley Wood, partner at GreySpark, a capital markets consultancy.
Under Dodd-Frank, certain swaps are subject to mandatory clearing. These products will additionally be forced to trade via an exchange or on a SEF. Exemptions have been made for end-users hedging commercial risk or when no exchange or SEF makes the swap available for exchange. Hedge funds will be required to establish trade connectivity by connecting to multiple trade affirmation and capture platforms and SEFs if they have clearing-eligible products in their portfolios. Futures Commissions Merchants are likely to pass on the costs incurred setting up systems and technology to provide connectivity with multiple CCPs, SEFs and swap data repositories to managers.
A recent GreySpark paper identified what it expected to be the top 12 SEFs based on product coverage, volumes, current market share and positioning. They were BCG Partners, Bloomberg, Creditex, FXall, ICAP, Javelin, MarketAxess, State Street, Tradeweb, Tradition and Tullett Prebon.
“However, preparations are being hindered by differences of opinion and delineation of regulatory jurisdiction between the SEC and CFTC. The SEC, for example is regulating interest rate swaps and credit default swaps while the CFTC is regulating CDX or credit default swap indexes. The lines are becoming very blurred and complex,” said Wood.
Furthermore, the rules have not yet been finalised in Europe with a final draft of EMIR expected towards the end of September. Wood is optimistic preparations will be easier in Europe. “I suspect the EU will just copy what the US is doing given that the US has done all of the groundwork,” he said.