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SEF’s- Execution Day

Mandatory trading of SEF’s begins today- 18th February 2014. The 30-day countdown from Javelin’s MAT certification expired on the 15th February; practical start was delayed by the weekend and Monday’s President’s Day. From today, USD and EUR T+2 benchmark IR swaps with the following liquid tenors: 2 year, 3 year, 5 year, 7 year, 10 year, 12 year, 15 year, 20 year and 30 year- must be traded on an exchange or SEF.

Although the change from phone to SEF is uncompromisingly binary, in practice today is more of a noteworthy spark than a Big Bang. The USD benchmark market is already largely on-SEF, while the EUR and GBP markets have been routed through non-US entities. The CFTC’s 12th February guidance that European MTF’s will be SEF-equivalent will accelerate this trend, as it should allow US entities to trade non-USD products effectively off-SEF. SEF volumes and liquidity will likely devolve to USD products. While some smaller clients, daunted by documentation and connectivity issues, may migrate to the futures or securities markets; today should be BAU for the majority (by volume) of market participants.  The situation is more acute in the CDS market, in which by most estimates, only 10% is currently traded on-SEF.  The first benchmark CDS begin mandatory SEF trading on the 26th February 2014.

Like or loathe them, the SEF’s come of age today. They have had a difficult childhood- mired in legal fiat-by-footnote confusion, criticized as a one size fits all answer to a question nobody was asking and accused of privileging transparency over liquidity. The CFTC has been heavily criticised for imposing a standardised futures-exchange template upon a diverse and complex market ecosystem.  Among fierce competition, the SEF mandate is probably the least popular of all the Dodd-Frank reforms, the next few months will distinguish the prophetic from the merely critical.

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