SEF Approvals Continue Whilst US Regulator Scrutinizes OTC Firm

The CFTC yesterday announced that it has approved two applications for SEF registration from DW SEF LLC and TW SEF

In keeping with the requirement stipulated by the Dodd-Frank Act, institutional trading firms are continuing to apply to the US Commodity Futures Trading Commission (CFTC) for registration as a Swap Execution Facility (SEF).

As yesterday’s business day drew to a close in North America, the CFTC announced that it has approved the applications of two further entities to register as SEFs.

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The organizations concerned are DW SEF LLC and TW SEF LLC, both of which are second and third entities for which the CFTC has issued temporary registrations as a SEF.

The applications of the companies, both of which are Delaware limited liability corporations, and are wholly-owned subsidiaries of Tradeweb Global were approved on September 6, by the CFTC’s Division of Market Oversight as part of the Dodd-Frank Act’s provision that firms must provide greater pre-trade and post-trade transparency to the swaps market.

Bloomberg SEF LLC was previously granted temporary registration as a SEF on July 30, 2013, rendering it the first company to obtain such registration.

In order to obtain and maintain permanent registration, TW SEF and DW SEF will be required to demonstrate continued compliance with all applicable provisions of the Commodity Exchange Act and CFTC regulations, including part 37 of the CFTC’s regulations, and any future regulations, guidance and interpretations issued by the CFTC.

Pioneering Stages

Whilst companies across North America are busily engaged in submitting such applications to the regulatory authorities, the whole concept of this method of restructuring the way that OTC trades are made transparent is a whole new concept, and the United states is somewhat of a pioneer in this respect.

At the end of June this year, Forex Magnates was present at a discussion panel which included several senior industry figures in which SEF registration was discussed. James Kemp, Managing Director of the Global FX Division at the Global Financial Markets Association (GFMA) had a question to ask on this matter.”

The question he posed to the panel was: “What is surprising about the rulings surrounding SEFs is that there are only 2 regimes looking at execution requirements, which are the US and Europe under the Dodd-Frank Act and MiFID rulings. How is this going to relate to trading globally in these products?” asked Mr. Kemp.

This raised a series of opinions across the panel, the conclusion of which was that the majority of jurisdictions have made a link between clearing requirement and execution mandate. What took many industry executives by surprise at the time of the rulings being announced was that any many-to-many platform, even if no clearing mandate is applied, has to register as a SEF under the Dodd-Frank rulings, therefore, this creates a SEF-like regime. This is still in its early development phases and relates to ownership of platforms.

Triana’s CMO Nick Solinger then demonstrated his concern over potential latency in closing orders caused by reporting obligations: “If you trade on Reuters or EBS, your trade is done at the point of execution,therefore, we have to ensure the process of clearing relationships doesn’t make us take a step backward, and take up time on the pre-trade side, yet still ensure it complies. There is still work to do to closing the gap. An order gets approved, sits on the book for 2 hours and this gap must be closed.”

Other Regimes May Follow – But Not For Some Time

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During the panel discussion, Jacqueline Liau, FX Prime & Global Head,Product and Service at HSBC expressed that there are practical considerations in the method by which trades are executed and reported that may be of actual benefit, and that other regimes are likely to follow: “Within the SEF trading requirements, there is a reduced number of quotes. I see this as a positive step. Voice trading is still allowed, which is also good. When it comes to FX products we still have to work out realistically how to get a clearing system for FX options, and when it comes to NDFs we need to find out when we will need clearing mandates for clearing NDFs.”

“This may be 2014, in the US 2014, a bit later in Europe. Hong Kong and Singapore have put it back, I expect it to be probably effective in those regions at the end of 2014. On this basis, we are unlikely to see much SEF activity in FX for some time” stated Ms. Liau.

Big Brother Is Watching You

Further alluding to the US government’s tenacity in ensuring that electronic trading firms can provide full transparency on their pricing, and that all trades are reported correctly, the CFTC has been conducting an enforcement review on certain firms. Yesterday, the regulatory authority announced that it had released the results of such an enforcement review in which electronic futures exchange ELX Futures was the subject of scrutiny.

The review covered the target period from June 1, 2011 to May 31, 2012. The Division of Market Oversight assessed the Exchange’s compliance with Core Principles 4 and 5, pre and post Dodd–Frank Act, relating to the Exchange’s market surveillance program. ELX contracted with the National Futures Association (NFA) to perform certain regulatory services on behalf of the Exchange, including market surveillance. Therefore, the review also examined NFA’s performance of its market surveillance responsibilities.


The Division had no recommendations with respect to the Exchange’s and NFA’s compliance staff, market surveillance systems, routine surveillance of market fundamentals, surveillance of expiring contracts, or monitoring of large traders, position limits, and exemptions from position limits.

A clean bill of health such as this can be achieved by use of such surveillance systems, either by the firm itself as is the case here, or as is becoming increasingly the case in other jurisdictions, particularly the Asia-Pacific region, by the regulators.

In the case of the CFTC’s enforcement review of ELX Futures, although there were no recommendations to be made, the regulator identified some areas in which the Exchange or NFA need to make improvements.

The Market Oversight Division made several recommendations regarding NFA’s and ELX’s documentation and log procedures for inquiries and investigations. Among other things, the Division notes that it recommended that any inquiry or investigation that is initiated by NFA, even if NFA later determines to proceed with it, should be documented, logged, closed with a closing memorandum, and retained by NFA.

In addition, with respect to Exchange for Related Position transactions (EFRPs), the Division recommended that the NFA includes Exchange for Related Position (EFRP) transactions electronically, matched by a third party provider in the existing pool of transactions subject to random review, and that the NFA strategically select more EFRP transactions for review with an eye to detecting misconduct.

The final stipulation is that the NFA should ensure that it reviews EFRP transactions from every Clearing Privilege Holder that clears EFRPs on ELX every calendar year.

Surveillance is a method which is becoming increasingly used by regulators and firms alike. A full and detailed insight into the use of such systems in the Asia-Pacific region, an area where the regulators have embraced such technology, will be included in the forthcoming Forex Magnates Quarterly Industry Report for Q3 2013.

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