The big bang theory of the Sef evolution

The big bang theory of the Sef evolution


The forthcoming deadline for swap execution facilities (Sefs) to become compliant with Dodd Frank will not trigger a big bang in trading activity, according to a panel of industry experts writes Jonathan Watkins.

With the current implementation date just a week away, the market awaits to see whether a surge of activity will be pushed through the new platforms for the clearing and trading of swaps.

Around 20 Sefs have filed for application with the CFTC to capitalise on the new flow of cleared OTC derivatives business, with most approvals from the CFTC coming in the past week or two.

The likes of Bloomberg, Intercontinental Exchange and trueEX will battle each other in the Sef arena come October 2, the date pencilled in by the CFTC for compliance.

Whether this date should be again delayed remains to be seen, but for the handful of temporarily approved Sefs, next Wednesday currently stands as the day when a new era of swaps trading will commence.

But according to industry experts discussion the platforms at FIA’s Bürgenstock event, the day will not herald an notable explosion of trading.

“I think our type of firms will have a wait and see attitude because it’s not clear which of these 19 Sefs will be successful,” said Remco Lenterman, managing director, IMC Financial Markets and chairman FIA European Principal Traders Association.

“There is not going to be a big bang.

George Harrington, global head fixed income trading at Bloomberg, said he believed there would be trades but not as many in comparison with the OTC activity currently performed.

“I think we will be going backwards before going forward,” said Harrington.

“Competition is making everyone uncomfortable.

“If Sefs become expensive and market participants are marking less money, then when you look at the business the liability is concerning.”

Bloomberg became the first Sef to be approved by the CFTC in August, just two months after the CFTC approved the final rules for the platforms.

The regulator brought the minimum request for quote down to two for a phase-in period in the first year before increasing to three, and also set thresholds for block trades, which can be reported with a delay to the market.

The CFTC voted for a minimum block size of $460m for two-year swaps, $240m for fives, $170m for 10s and $120m for 30-year contracts.

As with the RFQs the block sizes will increase after 12 months.

Since the rules were finalised in May, Sef applications have come thick and fast to the desk at the CFTC, with its chairman Gary Gensler saying the regulator only had time to give the paperwork a “cursory” glance.

John Wilson, global head of OTC clearing, prime clearing services at Newedge said he believes there will be a big bang in terms of venues launching and then a big crash when it all falls back in.

“Because of people’s uncertainties, ‘which venue should I go to?’ There is going to be a discovery process,” said Wilson.

“82% of firms said they would not trade with US firms. Why? Because they said’ this Dodd-Frank stuff sounds pretty awful, I’ll stay away from that.’”

Jeffrey Howard, managing director, global head of prime service markets, RBS Securities said: “Trades will occur but will occur then get pulled back.”

CFTC chairman Gary Gensler noted last week that the CFTC was aware of problems and recognised the difficulty for platforms to meet the deadline.

He also addressed some of the problems facing platforms come the launch date.

“We are aware of some issues – whether it is how the pipes are between Sefs and clearing houses work, and some of the pipes between Sefs and data repositories work,” said Gensler.

“We want to sort through those things."