The US Commodity Futures Trading Commission (CFTC) has approved Thomson Reuters' swap execution facility (SEF) application in conjunction with FXall on a temporary basis, ahead of this Wednesday’s controversial US SEF go live.
The Thomson Reuters application was made on 9 September 2013, ahead of the 2 October SEF start date in the US, which has been questioned by the CFTC’s own Commissioner Scott O’ Malia, who last week called for more time for the SEF reforms to be introduced. The Footnote 88 introduced at the last minute by the CFTC, and called “notorious” by O’ Malia himself, means a lot of firms that thought they were exempt from the SEF obligations must now comply. The introduction of SEFs is further threatened by the imminent US government shutdown as arguments over the US budget intensify.
SEFs are a new type of trading venues created by the Dodd-Frank Act, and are likely to be categorised in Europe under the MiFID II Organised Trading Facilities (OTFs) stipulations. The need to introduce them is linked to the post-crash Pittsburgh G20 agreement back in 2009 to reduce systemic risk on financial markets by increasing transparency in the over-the-counter (OTC) derivatives space. The new environment demands that OTC derivative trades, excepting corporate treasury ones designed to hedge, must now be standardised, centrally cleared and reported and effectively traded 'on exchange' using platforms such as SEFs.
The confusion caused by the Footnote 88 addition by the CFTC extending the reach of the rules has lead to a number of temporary licenses for SEFs, such as Thomson Reuters, and some 'no action' missives are inevitable for those deemed to be breaking the rules while the new environment settles down.
The acceptance by the CFTC of Thomson Reuters' SEF means it can support US regulated trading of foreign exchange (FX) non-deliverable forwards (NDFs) and options from this Wednesday 2 October onwards as an approved SEF.
FXall and Thomson Reuters customers that have completed the on-boarding process will have access to the latter’s SEF trading capabilities as part of their partnership agreement. The two companies began the on-boarding process to the Thomson Reuters SEF with clients and liquidity providers back in July 2013 and are now ready to take advantage of the changed market environment.
“The implementation of our SEF is an important milestone for Thomson Reuters and our customers as we work with them as their strategic execution partner to meet their workflow and execution requirements,” said Phil Weisberg, global head of FX, Thomson Reuters. “Going forward, as new regulations continue to come into effect around the globe, Thomson Reuters and FXall clients can rest assured that they will be able to continue executing their necessary FX trades in a manner consistent with current workflows and in compliance with all regulatory requirements.”
The addition of the Thomson Reuters SEF will provide customers a consistent workflow for trading regulated and unregulated FX products. Customers will be able to trade SEF-regulated swaps, FX NDFs and options, electronically through the same system they use for FX spot, forwards and swaps, money markets and precious metals. Thomson Reuters SEF is connecting to other participants in the regulated trading process including clearing organisations, swap data repositories and clearing brokers to meet SEF reporting and clearing obligations.
Many other SEF platforms have already been launched by Integral, Triana, MarketAccess and Etrading among many others – see the links in this bobsguide news story. The Tullet Prebon brokerage firm also filed for SEF approval last month.
With an estimated 40-50 SEFs planning to launch this week, the prospect of sourcing liquidity across a fragmented market place, presents concerns to financial market participants. In the absence of a crystal ball determining which of these numerous platforms will prove highly liquid, and as such desirable, broker-dealers and others face the technical challenge and financial implication of potentially needing to connect to multiple different venues quickly and easily. Until it is clear what platforms are attracting the most liquidity it may be wise to ‘cover all bases’, as much as this is possible on constrained budgets.
The FIX messaging and standards organisation for the financial markets published their FIX Trading Community SEF guidelines last week covering the electronic communication of client entitlement information between broker-dealers and the emerging SEFs, which launching in the US on 2 October under the new post-crash regulatory environment. SEFs will shortly go global as part of the move towards more regulated over-the-counter (OTC) trading with central repositories, clearing and reporting all now essential and others are of course rushing to offer standards, help and platforms for this new environment.
The new regulatory landscape laid out at the post-crash Pittsburgh G20 meeting back in 2009 is finally coming into fruition. The regulations laid out then, are now beginning to alter the shape and structure of the financial markets of the future and this week’s US SEF launch is just the start.
• For more about the capital markets arena and the profound regulatory and market changes happening there, please read the bobsguide blogger (aka contributing editor) submissions curated by Daniella Huggins at FIX.