Q+A-What’s at stake for swap-execution facilities?

By Reuters Staff
September 7, 2010

By Roberta Rampton

WASHINGTON, Sept 7 (Reuters) – The fight over who gets to be a swaps execution facility, or SEF, is shaping up to be one of the most contentious aspects for implementing the swaps portion of the new Wall Street reform law.

Here are some of the issues:


Lawmakers insisted on transparent trading for swaps as part of the effort to decrease systemic financial risks. But because it can be hard to trade swaps on exchanges, they invented a new category of regulated market called a swap execution facility.

The law calls it “a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce.”

“If the word ‘swaps’ was replaced with ‘goods’ this could be a description of eBay,” wrote Kevin McPartland, an analyst with TABB Group, in an article submitted to regulators last month.

What type of business models meet the broad description given by Congress will be determined by detailed regulations from the Commodity Futures and Exchange Commission and Securities and Exchange Commission under tight timelines.

“Until the CFTC actually issues its proposed rules, no one really knows what a SEF is and what its functionality is going to be,” said Michael Philipp, partner with Winston & Strawn in Chicago.


Companies that traditionally have been big players in the business of trading, facilitating, brokering, dealing and clearing in the $615 trillion over-the-counter swaps market today are jostling to ensure they stay in the game.

A large group of dealers including Barclays, Citigroup, Credit Suisse, Deutsche Bank, Morgan Stanley and others had a conference call with CFTC and SEC regulatory staff last month focused on key SEF issues.

Some players that have already said they will apply to regulators to become SEF, including IntercontinentalExchange Inc, BGC Partners, GFI Group, ICAP, Tradition, Tullett Prebon, MarketAxess Holdings, and MarkitServ, owned by Depository Trust & Clearing Corp (DTCC) and Markit.

Dealers are expected to try to turn private networks into SEFs, and new players also are expected to emerge.


Regulators will define that, too. The new law will require many types of swaps to be cleared through central clearinghouses to make the trades less leveraged, lessening risk. Any swap that clears must trade on an exchange or a SEF.


Exchanges have algorithmic systems for matching up bids and offers, and open order books. It’s possible some swaps might trade on exchanges, but many require some element of customization or negotiation on terms, or are too specialized to trade on exchanges.

The law’s wording may allow for a broader range of models. “You may still be able to keep in place some notion of bilateral consummation of a trade, as opposed to an automated consummation,” said Joel Telpner, partner with Jones Day in New York.


The law says clearinghouses can’t discriminate against swaps executed at unrelated SEFs or exchanges. Some would-be SEFs are worried clearinghouses affiliated with SEFs or exchanges will find ways around this “open access” principle through membership requirements or by preferential fees that encourage customers to trade and clear in-house.

But clearinghouses have argued that they need to be careful not to take on too much risk.

“It all sounds very good on paper to say, ‘Let a thousand flowers bloom. We’ll have hundreds of SEFs. They’ll all hooked to a clearinghouse and everything will be great,’” said Johnathan Short, a senior vice president of ICE, at a discussion held by regulators last month.

“I think we need to go into this very carefully, and I think we need to consider how all of this actually bolts together in the real world and allows the markets to be properly regulated,” Short said.


Rules for SEFs are to be finalized by next July. To meet that deadline, regulators have said they hope to propose draft rules for a host of issues, including SEFs, by mid-December.

But they have a six-month deadline for final rules to prevent conflicts of interest at SEFs, clearinghouses and exchanges, such as ownership and voting limits, governance rules, and access requirements.

(Editing by Lisa Shumaker) ((roberta.rampton@thomsonreuters.com; +202 898 8376; Reuters Messaging: roberta.rampton.reuters.com@reuters.net))


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

I do believe all of the concepts you have presented in your post. They’re really convincing and can certainly work. Still, the posts are very short for beginners. May you please lengthen them a little from next time? Thanks for the post.

fantastic put up, very informative. I wonder why the opposite specialists of this sector don’t notice this. You should proceed your writing. I’m sure, you have a huge readers’ base already!

I wish to get across my affection for your generosity giving support to people who actually need guidance on this one idea. Your real commitment to getting the solution across was exceptionally informative and has continuously enabled guys and women much like me to get to their desired goals. Your interesting report signifies this much to me and additionally to my peers. Warm regards; from each one of us.

magnificent issues altogether, you just received a brand new reader. What may you suggest in regards to your submit that you just made some days ago? Any certain?

Hello.This post was really remarkable, particularly because I was investigating for thoughts on this issue last couple of days.

It¡¦s really a nice and useful piece of information. I am happy that you just shared this helpful information with us. Please keep us up to date like this. Thanks for sharing.

Excellent beat ! I wish to apprentice while you amend your website, how could i subscribe for a blog site? The account helped me a acceptable deal. I had been a little bit acquainted of this your broadcast offered bright clear idea

Wow, fantastic blog layout! How long have you been blogging for? you make blogging look easy. The overall look of your website is excellent, as well as the content!

You can certainly see your skills within the paintings you write. The world hopes for even more passionate writers such as you who are not afraid to say how they believe. Always follow your heart.

Keep functioning ,terrific job!

you’re in point of fact a excellent webmaster. The website loading speed is amazing. It sort of feels that you are doing any unique trick. In addition, The contents are masterwork. you’ve done a excellent task in this topic!

Wow! This could be one particular of the most helpful blogs We’ve ever arrive across on this subject. Actually Excellent. I am also a specialist in this topic so I can understand your effort.

Thank you for every other excellent post. Where else may just anybody get that type of info in such a perfect manner of writing? I have a presentation next week, and I’m on the search for such information.

There is evidently a lot to know about this. I think you made various nice points in features also.

I have read a few good stuff here. Definitely price bookmarking for revisiting. I surprise how so much attempt you put to make this kind of fantastic informative site.

Wow! This could be one particular of the most beneficial blogs We have ever arrive across on this subject. Actually Magnificent. I am also a specialist in this topic therefore I can understand your effort.

I have recently started a web site, the information you provide on this website has helped me greatly. Thanks for all of your time & work.