White Paper: OTC Derivatives Regulations And Swap Execution Facilities

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For the last few years, IPC has conducted a survey across a wide array of capital markets participants to gauge the impact of the global financial regulations being put into place to force over the counter (OTC) derivatives onto exchange-like trading platforms known as Swap Execution Facilities (SEFs) in the United States or Organized Trading Facilities (OTFs) in Europe.

Last year’s survey responses demonstrated widespread industry underpreparedness for the challenges related to the implementation and compliance of the new regulatory requirements. This year’s survey results showed some improvement on the part of individual firms’ readiness, but continued to denote a significant lack of industry-wide preparedness to comply with these new regulations.

SEFs and OTFs are a product of Dodd- Frank and Markets in Financial Instruments Directive (MiFID) respectively and are designed to reduce the opacity of the OTC derivatives markets. As the swaps market already existed and continued to operate while the SEF model was under development, business as usual was complicated by the knowledge that it would need to change to support the first of certain categories of swaps to be required to be traded on these exchange-like platforms. While it is too early to tell the overall effect these changes will have, it is clear that these new OTC derivatives rules will require a change in how the market works and how firms conduct their business.

State of The Market

The data indicates that more than half (58%) of the respondents indicated their firms were already trading swaps and other OTC derivatives at the time this survey was taken. While 42% of the respondents said that they intended to begin trading swaps and other OTC derivatives in the next six months or later in 2014 after the new regulations were put in place.

Even with the interest in this market, the survey suggests that as a whole the industry is not on track to meet the requirements for SEF trading. Only 40% of the respondents felt that the industry was on track to meet its deadlines, while another 40% felt the industry was “somewhat behind” and a further 20% were certain the industry was “significantly behind.”