There has been a lot of debate around the role of SEFs in the global derivatives market. Some commentators are even claiming that the whole concept is dead and buried before the rules have even been finalised.
But debating the viability or otherwise of SEFs is completely missing the point. The right question is how will standardised and custom derivatives contracts trade and clear in a post Dodd-Frank/EMIR world? What these regulations are doing is removing an artificial barrier that has separated futures and OTC workflows for more than 40 years. This has the potential to upset the whole apple cart as proponents defend their turf and vie for control of the piece they don’t own. This struggle is being played out between venues (SEFs v futurisation), clearers (SwapClear v ICE Clear/CME Clearing) and even within the broker dealer and IDB community. On the receiving end is the buy-side which is faced with a rising cost of participating in derivatives markets, just at a time when it is actually looking for efficiencies instead.
The future role of SEFs is an important (but relatively small) question in the total set of changes the derivatives industry is going to go through. Anyone who isn’t prepared for the totality of these changes (and the aftershocks of unintended consequences) might be in for a nasty surprise.
Hi Steve – very salient, and topical, point that cuts through some of the noise that unfortunately clogs up the channels of communication, from the (valid) sentiment that “SEFs are like a ghost”, as one panelist at FIA NY Expo remarked, to the (also no doubt valid) lawsuit Bloomberg has brought against the CFTC for their treatment of swaps vs. futures. Meanwhile, June 10 approaches – the next wave of mandated clearing for IRS and CDS, for the “Category 2” entities, some 2,000 firms by most estimates. This indeed could be a tipping point in how “the totality of these changes” which you speak of begin to get marked to market. Let’s hope the system minimizes any negative VM….