CFTC SEF Debate Sets Up Dodd-Frank Showdown

In the agenda, the CFTC has listed core principles and requirements for swap execution facilities, large swaps trades for block SEFs, and procedures for making a contract available to trade on the facility as being the key points of discussion.

The CFTC has been frequently criticized for its erratic approach to final rulemaking when it comes to the establishment of SEFs, which will allow for swap contracts to be executed electronically, in line with Dodd-Frank Act requirements. Traditionally conducted by voice on a bilateral basis, the rules are meant to reduce opacity in the over-the-counter derivatives markets, which were blamed in large part for causing the recent financial crisis. Senior figures at the CFTC have routinely thrown out prospective deadlines for the rules over the past year, nearly all of which have been missed with little recognition. Public opprobrium has escalated to such an extent that Commissioner Scott O'Malia, speaking to Risk recently, said that he had forced himself to stop giving potential dates to the press.

Courting Controversy
One of the key points of contention around proposed SEF rules has been the requirement for request-for-quote (RFQ) practices to include five SEFs, which industry critics have described as arbitrary and unworkable in practice. Others have argued that they risk information leakage and exposure through the practice by giving away their trade intentions. Further areas of concern have been around the emergence of swap futures contracts, and would-be SEFs have expressed outrage that they are being forced out of the market by particular rules around margin requirements and liquidation periods. Bloomberg, notably, has sued the CFTC over what it sees as anti-competitive business practices.

Other platform providers have expressed even more basic concerns, with one potential SEF registrant, speaking on background in February, complaining that they were unable to even budget for the registration process as the fee rates hadn't been released. Yet more have expressed concern that designated contract markets (DCMs), which operate in much the same way that SEFs will but with lower regulatory thresholds, will obviate the business model entirely, particularly with the ongoing futurization of swaps.

Long View
Yet there is an argument that the regulators can't seem to win. If they bring things out on a timely basis, they're instantly accused of not thinking it through. If they don't bring them out on time, they're prevaricating, and it's damaging to the industry. I'm fully aware that the regulators aren't paragons of propriety, but I do have sympathy for them at times.

There is an argument that the regulators can't seem to win. If they bring things out on a timely basis, they're instantly accused of not thinking it through. If they don't bring them out on time, they're prevaricating, and it's damaging to the industry.

Look, some rules are just plain dumb. Why force people to issue five RFQs when two will do? Likewise, why even establish SEFs if you're going to make it simple for DCMs to thrive, or for exchanges to have weighted rules in their favor? The total lack of information and the inevitably short deadlines hardly do much to endear the CFTC to the industry, either, and let's not even talk about the Securities and Exchange Commission's approach to Dodd-Frank rulemaking so far. But arguments about disintermediation, futurization, standardization and all else aside, I'm sure many people are watching Thursday with anticipation.