29 November 2011
Swap Execution Facilities (SEFs) are the top fashion item of the season and conference sessions including SEFCON II are packed with attendees. What remains to be seen is whether SEF rollouts in 2012 will match the hype. A quick word on the new lexicon: The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the European Market Infrastructure Regulation (EMIR), and the Markets in Financial Instruments Directive (MiFID, MiFID II, MiFIR) have introduced several new acronyms to our market lexicon, two of which are SEF and OTF. Swap execution facilities fall under the regulatory purview of the US, while organised trading facilities fall under the purview of European regulators. In a new report, Swap Execution Facilities and Organised Trading Facilities: A New Market Structure Emerges, we examine the emerging SEF/OTF market structure and provide some clarity for those firms engaged in 2012 strategic planning and beyond. We also assess the likely IT impact across the range of market participants and derivatives systems components. A future report will assess where firms are with SEF/OTF rollout and ultimate compliance and what remains to be done. Much will depend on regulatory clarity in 2012 and everything ultimately depends on the volume of trades and liquidity. The swaps market is a product-by-product market and adoption of SEFs/OTFs depends not only on the rules, but also the participant (i.e., small bank vs. large bank, small buy side vs. large buy side, small corporation vs. large corporation). All told, we believe SEFs will be a good force for competition in the market, but overly prescriptive rules or a lack of flexibility could lead to a market structure where nobody wins, including both users and dealers.