White paper: SEFs Here at Last, but Where and How to Trade on Them


This white paper provides an overview of SEF regulations and markets in the United States and highlights some of the early trends in trading availability. It also provides some details on likely OTFs and other OTC derivatives trading venues beyond the United States and EU.



In the aftermath of the 2008 global financial crisis, the leaders of the world's 20 major economies met at the initial G-20 summit and agreed on a number of OTC derivatives reforms in the Washington Declaration. The Action Plan's Enhancing Sound Regulation-Prudential Oversight section stated:

Supervisors and regulators, building on the imminent launch of central counterparty services for credit default swaps (CDS) in some countries, should: speed efforts to reduce the systemic risks of CDS and over-the-counter (OTC) derivatives transactions; insist that market participants support exchange traded or electronic trading platforms for CDS contracts; expand OTC derivatives market transparency; and ensure that the infrastructure for OTC derivatives can support growing volumes.

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Over the five years since, national governments and regulators have set out to enact laws and implement regulations embodying what they agreed to in the Washington Declaration. The United States was the first to enact laws with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) in 2010 and to implement regulations around OTC derivatives execution with the CFTC's final rule for Core Principles and Other Requirements for Swap Execution Facilities in 2013. The SEF was born.

While the term "SEF" may be new, the trading venue construct relies on previous financial market structure evolution around cash and derivatives products and incumbent electronic platforms as a template to provide scaffolding around the mandatory multilateral electronic execution of OTC derivatives. The CFTC was just the first regulator out of the gates, and even in the United States there will be further regulation issued by the SEC for security-based SEFs. The EU's Markets in Financial Instruments Directive II (MiFID II) will give birth to a similar entity, the OTF, and other nations will follow suit. For now though, U.S. SEFs are it, and they will surely serve as the OTC derivatives petri dish for execution reform, which the rest of the world will learn from.

This white paper provides an overview of SEF regulations and markets in the United States and highlights some of the early trends in trading availability. It also provides some details on likely OTFs and other OTC derivatives trading venues beyond the United States and EU.

METHODOLOGY

Aite Group conducted research in Q3 and Q4 2013 via a series of meetings and phone interviews with market participants, electronic platforms and markets, and vendors and examined initial trade data. In addition, the author had a series of discussions with market veterans in cash and derivatives trading and sought their opinions on the history and state of the global OTC derivatives market.

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Other White Papers in the OTC Series

OTC Derivatives Clearing 101 - Making Things Clear
Key Trends in Financial Data Infrastructure 
Examining the Current State of the OTC Derivatives Market
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Equinix, Inc. (Nasdaq: EQIX) operates a global interconnection platform of more than 200 International Business Exchange™ (IBX®) data centers in 52 markets in the Americas, EMEA, and Asia-Pacific. Our mission is to protect, connect and power the digital economy.
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