Although still theoretical, swap execution facilities (SEFs) are almost a reality. By late 2012 or early 2013, SEFs will be the required location for electronic execution of centrally cleared, standardized swaps under Title VII of Dodd-Frank. SEFs will be a critical component of the evolution of the swaps market structure from nonstandardized, bilaterally cleared to standardized, electronically traded, centrally cleared swaps.
In a new report, Swap Execution Facilities: Opportunities in the Institutional Marketplace, Celent offers key insights into the core building blocks of what it takes to become a SEF, including SEF evolution and roadmaps. The report also offers a scenario for the future lifecycle of SEFs and opportunities and challenges for multidealer platforms operating as SEFs and dealers interacting with SEFs.
Achieving SEF status and operating as an actual SEF goes beyond registration and enhancements to platforms such as connectivity and clearing. Achieving SEF status is also a sequencing problem, as the timing of rules and registration must be synchronized with development. Furthermore, a prioritized development roadmap will deliver not only integration but also innovation.
At the same time, industry adoption will not necessarily follow SEF innovation. Even the most innovative SEF models must still capture the imagination and liquidity of large institutional players on the buy and sell sides. This is no simple task and goes beyond offering new trading protocols, as the success of trading protocols will be determined by the liquidity needs of market participants.
"Achieving SEF status will be significant, but it is only a rite of passage, not a guarantee of success," says David Easthope, Research Director with Celent's Securities & Investments group and author of the report. "The road ahead will be challenging and will take a significant and continuous commitment of resources."