U.S. derivatives regulators have pulled the registration of swap execution facility (SEF) operator TeraExchange. The New Jersey-based company was given an initial license to run a SEF in 2016, making it the first ever operator to be granted the ability to trade cryptocurrency derivatives, but no trading has taken place on the platform for 36 consecutive months.
“The Commodity Futures Trading Commission has issued an Order of Reinstatement to TeraExchange, LLC restoring its registration status as a Swap Execution Facility (SEF). The order, effective today, was issued in accordance with Section 5 of the Commodity Exchange Act and CFTC Regulations 37.3(b) and 37.3(d),” the CFTC said.
TeraExchange introduced the first Bitcoin swap agreement back in 2015, which was the first legal framework that allowed the two parties to hedge the cryptocurrency price risk using standardised terms.
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However, following this transaction, the Commodity Futures Trading Commission brought an action against Tera for what the regulator called the failure to prohibit wash trading and prearranged trading on the SEF platform. While a notable milestone, the CFTC said Tera promoted the transaction to create an impression of actual trading interest in the Bitcoin swap, while in fact, it was merely a non-competitive sale executed for testing Tera’s systems. Ultimately, the charges were settled without paying a fine though.
SEFs are trading entities that clear OTC products, such as OTC interest rate and credit swaps under the CFTC’s regulatory oversight. The new facility emerged out from the Dodd- Frank Act and Consumer Protection Act of 2010, which deemed NDFs as a financial instrument requiring mandatory clearing, providing greater pre-trade and post-trade transparency to the swaps market.
The US watchdog has issued a series of orders granting registration to a number of blockchain startups to operate as Swap Execution Facilities, better known as SEFs. But even outside the crypto space, much of the trading volume in this realm has been concentrated among a few big players. Among the mainstream asset classes, the list includes ICAP, BGC Partners, Tullett Prebon, CME Group, ICE and Bloomberg, with the latter capturing nearly 50 per cent of plain vanilla swap trades.