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Five, Six, SEFen, Eight....The dance around the new Swap Execution Facility rules

You’d think that now Title VII of the CFTC’s OTC trading rules passed – that some long-awaited clarity would arrive to derivatives trading.

You’d think that now Title VII of the CFTC’s OTC trading rules passed – that some long-awaited clarity would arrive to derivatives trading.

Expect no clear skies yet.

While the regulatory chiefs codified the rules themselves we, as an industry, begin the ardent task of interpreting them. Some players have joined this noble cause by entering new areas, atypical to their market focus, by registering as Swap Execution Facilities (SEFs) with the goal of harnessing the new demand – mandated down from the OTC Olympus.

But the rules are here and here to stay for the foreseeable future. And, there is still a vast amount of uncertainty as to who will make the cut as a SEF, or who will drop off. The question—based on where we stand now—is what can we do and how do we navigate through the grey areas?

What we do know:

  • The CFTC recently issued three rules that will move bilaterally traded swaps onto execution platforms – creating the standards for registering/operating SEFs, trading on SEFs or DCMs, and which block trades can still happen off-exchange.
  • These final rules represent ALMOST all of the SEF rules proposed by the CFTC
  • The path is much clearer now for SEFs to register
  • These rules become effective August 5, 2013

What we don’t know:

  • The final ruling on owning and trading on SEFs to avoid conflicts of interest – which would impact some large dealers.
  • And, whether market participants are truly ready for trading on SEFs

So, what does this mean and why do we care?

Basically, firms need to ensure connectivity is in place to multiple SEFs and trading venues around the world. Accounting for any evolutionary drop-off in the SEF game, more connections mitigate any disruption in the lifecycle.

And, preparedness ensures competitive advantage, even as clarity deepens. Once the skies open a little and the industry sorts out all of the details (big details), staying ahead of change will allow your firm to step fluidly around obstacles and challenges down the road.