SEFs Face a New Challenge - Lee Olesky
The landscape for derivatives trading on swap execution facilities has changed drastically since these newly regulated platforms first launched in October of 2013. The adoption of electronic SEF trading has catapulted in recent months, leading to record IRS volume on Tradeweb. However, the industry faces some important challenges ahead in terms of the broader implementation of Dodd-Frank reform.
Addressing the key issues in SEF trading today, Tradeweb CEO Lee Olesky shared his insight on how the marketplace may continue to evolve in the FT Trading Room:
Comment: Sefs face new challenge
The summer of 2010 marked the beginning of the most radical reform in the history of the US over-the-counter derivatives markets with the ratification of the Dodd-Frank Act.
A marathon of rulemaking and implementation of mandates for the reporting, clearing, and trading of swaps finally led to the creation of Swap Execution Facilities, or Sefs, just over a year ago.
The launch of Sef trading was a seminal moment across the financial services industry, bringing derivatives trading on to regulated platforms while significantly increasing the transparency and efficiency of a $700tn market through technology. The ripple effect has transformed the entire sector, from establishing pre-trade credit checks to new post-trade processing and reporting.
The key question remains: is the derivatives market functioning well under the new regulation?
There was a lot of concern last October about what swaps would have to be traded on Sefs – a process known as made available to trade (MAT) – and how this would all precisely play out. One year later, we are seeing an orderly transition to a more transparent marketplace – but the work is not done.
Investors have taken their first steps towards embracing the next era of swaps trading, and buyside volume has swelled on Sefs. Over Tradeweb’s 16-year experience in building and operating electronic markets, we have not seen any other fixed income asset class adopt electronic trading so aggressively as the derivatives industry over the past year.
Reform has been the clear catalyst in driving the transition to a more modern marketplace, but the response from market participants, clearinghouses, execution venues, and post-trade service providers has also been essential to the story. Working tirelessly to build and update the operational infrastructure to comply with new rules, the preparation has paid off.
Since the Commodity Futures Trading Commission (CFTC) first certified a segment of derivatives instruments as made available to trade, there has been no significant disruption in the ability of market participants to access liquidity. Meanwhile, Sef trading volumes have increased dramatically, along with overall transparency in the pricing and reporting of swaps.
But the industry faces a significant obstacle to achieving a more transparent and efficient derivatives market: the responsibility of the Sef to determine and propose what swaps are made available to trade. Market operators should not have the responsibility of determining which products trade on regulated markets, as is the case at present. The authority should lie with the regulators after they gain appropriate input from Sefs and the marketplace.
The process today means market participants could see products forced on to platforms in support of individual Sef’s own commercial interests, which is not good policy, or good for the markets.
Leveraging their experience with input from Sefs and existing Sef trading data, the CFTC can establish mandatory and objective criteria for determining what swaps should trade on these markets, and drive meaningful oversight for an increased scope of derivatives trading. This would alleviate concerns about a Sef recklessly using the MAT process, as well as bring more order to a potentially unwieldy process.
If it is unwilling to change the current process, the CFTC must apply a critical eye to the evidence Sefs cite in support of the MAT factors and should use the tools at its disposal – such as no-action relief and phasing – to protect the marketplace from MAT submissions that lack foundation or would lead to a material market disruption. This would ensure submissions are truly informed and would lead to an effective transition of products that have been made available to trade on to Sefs.
The adoption of Sef trading is real, but the transition must continue in a disciplined way. We’re ready to take the next step forward, but the regulators must start us off on the right foot.
Lee Olesky is the chief executive of Tradeweb Markets