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SEFs and Footnote 195- does the CFTC hate trees?

Yesterday’s Risk magazine carries an alarming article, referring to a recent conference call between SEFs and the CFTC. The call’s purpose was to clarify footnote 195 of the core principles for SEFs, referring to confirmation checks on executed swaps. Participants were shocked to hear that for uncleared swaps, SEFs are expected to hold ISDA agreements in physical paper form. The master agreement is to be submitted to the SEF prior to trade execution. This is in direct contravention of normal market practice in which the vast majority of swaps are confirmed electronically[1]. The implication is that SEFs will have to request, store, manage and consult (potentially) thousands of paper, bilateral agreements. The initial compilation of such a large library would be a daunting task; however, this may be trivial compared to keeping the records up-to date and accurate with frequent amendments. Forex platforms executing NDFs and FX options are likely to be most affected, their products are not cleared and volumes can be high.[2] SEFs may already be falling foul of the requirement, it is unclear whether the footnote applies from the 2nd October 2013 SEF registration deadline or the 18th February 2014 mandatory SEF execution start date. Either way, given that no platform currently holds master agreements in paper form, it is certain that they will not comply by next week.

The requirement is wholly impractical, the agency might as well have asked for records to be stored as clay tablets. In the short-term the rule will be subject to the usual no-action routine, longer-term it is hard to see it surviving. The agency has recently shown signs of preparing to rationalise the mess created by years of slapdash legislation; it is to be hoped that this latest high-handed, detached from reality “Guidance” does not represent a reversion to form.


[1] ISDA April 2013 survey found that electronic confirmations used in the following proportions and products: 98% CDS, 86% IRS, 69% FX options, 66% commodities

[2] Their chagrin may be exacerbated by having been initially forced onto the SEF regime by Footnote 88 of the SEF rules.

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