Single Dealer platform a financial forum asked a very logical question to CFTC 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!
- Has CFTC given too much power to SEFs? (singledealerplatforms.org)