Has CFTC given too much power to SEFs?


Last week the CFTC passed the key rules that will govern how OTC derivatives will trade under the new Dodd-Frank regulatory framework.

By so doing, the CFTC has in effect devolved/transferred many important decisions regarding ‘where, and when’ swaps will trade over to the new market infrastructure and trading venues themselves, but will this give too much power to new trading venues?

One of the major rules that was passed, govern when a swap is ‘made available to trade’, or (MAT).  This rule will determine which swaps are required to trade on Swap Execution Facilities (SEFs) or Designated Contract Markets (DCM).

The rule in effect states that swaps that are subject to clearing, will be required to trade on a SEF or DCM, except where no SEF or DCM makes the swap ‘available to trade’.

And what or who determines when a swap is made available to trade?

Yep you guessed it, the SEF or DCM can ‘self determine’ that the swap is available to trade on their platform, and submit that determination to the CFTC. The determination must consider one or more of the following factors:

1) Whether there are ready and willing buyers and sellers?
2) Frequency and size of transactions
3) Trading volume
4) Number and types of market participants
5) Bid/ask spread
6) Typical number of resting firm and indicative bids and offers.

Once approved, then all SEFs and DCMs who offer that swap for trading, must do so in accordance with the trade execution requirements usually within 30 days. Moreover, the swap will subject to trading on SEFs and DCMs until such time as no SEF or DCM lists it as available for trading.

That’s a lot of market power being given over to trading venues, and to those individual SEFs/DCMs that are quick off the block to ‘self determine’ products!

12 Responses

  1. What are the implications of these rules for a mature electronic product set such as FX?

    Given the majority (FX) are not cleared, are these rules not applicable?

  2. Reblogged this on The OTC Space and commented:
    An interesting unexpected outcome – once one SEF makes a product available to trade, they all do. Nightmare for your internal change control and planning. I shall avoid owning a SEF for a while.

  3. […] Single Dealer Platforms asks a good question: Has CFTC given too much power to SEFs? […]

  4. […] Update: A shout out to Single Dealer Platforms (which is quite generous in linking to SWP), which expressed similar skepticism about available-to-trade before I posted this. […]

  5. […] Has CFTC given too much power to SEFs? (singledealerplatforms.org) […]

  6. Reblogged this on Pink Iguana.

  7. Note that under the SEC’s proposal for security-based sefs, the issue of whether something is available to trade rests with the SEC.

  8. […] ….That’s a lot of market power being given over to trading venues, and to those individual SEFs/DCMs that are quick off the block to ‘self determine’ products! Full post here […]

  9. […] 5, 2013: SEFs may begin to designate products as ‘made available to trade’ to the CFTC, which has 100-day review […]

  10. […] Made Available to Trade (MAD) applications have been made, and mandatory trading is months […]

  11. […] Has CFTC given too much power to SEFs? […]

  12. […] Interestingly, I recall making a similar observation last May, when I commented that: […]

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