What I Learned at SEFCON VI

The 6th annual SEF event took place on Monday. Always a good day to meet folks and hear what’s happening in SEF-land. As usual I’ll summarize the event for those who could not attend.

For starters, ICAP pulled out of the WMBA so was generally not present. I noted only one ICAP representative in the event, but did see a few others hanging out in the lobby and drinking the free coffee. And with the BGC acquisition of GFI, technically the WMBA is down to just BGC, Tradition and Tullet Prebon.

Panel 1 – SEF Leaders

SEFCONVIShawn Bernardo chaired a panel that had Jamie Cawley (BGC), Doug Friedman (Tradeweb), George Harrington (BBG), and Rick McVey (MarketAxess).

Shawn led with the question that has been on my mind in advance of the event – has anything really of note happened this year in SEFs? He of course phrased it differently but Jamie mention his acquisition of GFI, George noted a pickup of CLOB activity in credit, and Rick and Doug seemed to agree not much has changed this year, and it has rather been a year of “blocking and tackling”.

All SEFs are still only temporarily registered, and over the day I learned that SEFs have recently been getting questioned by the CFTC in advance of SEF’s getting their approval. There seems to be a January/February timeframe for this to happen. Why even bother getting final registration? I suppose it means that once you are formally approved, you’ll be open to fines and other enforcement actions (like being closed down) if you do not adhere to policies / core principles. Hence it will have to become clear before then what things like impartial access really means, and other forgotten items like how to handle position limits, and footnote 195 (the one that says each SEF has to have every participants bilateral master agreements with each other).

Lastly – Rick said he felt that SEF’s should be competing on protocols. I would echo that. There seems to be a notion that every SEF has to have an anonymous CLOB protocol with an optional RFQ offering. But wouldn’t it be more appropriate for SEFs to be encouraged (and allowed) to offer name-disclosed CLOB, name-anonymous CLOB, auctions, RFQs, etc, etc. It’s sort of what is happening today anyhow. After all, its any means of interstate commerce right?

Panel 2 – Geopolitical Risks

Jeffrey Hogan of BGC led this panel, and unfortunately I had 90 minutes of “work” to do on Monday so chose to skip out on this panel. Sorry Jeffrey. It was a tough decision which panel to skip – and given the fact my eyes tend to glaze over when I hear “extraterritoriality” I chose to skip this one.

I was however able to glean throughout the day that equivalence is still far from settled. Massad noted in his speech that they are at least having the discussions and it is a top priority. And MiFID / RTS seems so far away – at best 2017 with various phasing in periods.

I did learn over the day that the MiFID II authorities tend to loathe the idea of no-action relief, which makes me think that if there is this threat of “having to get it right the first time” that no regulator will be content to agree much until all the final details of the RTS is agreed. Hence I dont expect much progress here.

Keynote address – Chairman Massad

The Chairman had the room packed to hear his comments.  I was glad to hear him cite Clarus data to back up the progress on SEF-executed swaps.

He said a lot. I’ll bulletpoint my takeaways:

  • Permanent registration to happen in early 2016 – we later learned of a Feb 3 “deadline” (?) for this
  • Fine tuning continues – notably in extensions of no-action relief for Packages, block trading, confirmations, etc
  • Auction protocols were allowed and he generally supports Giancarlo’s efforts to open up more methods of execution (at the same time stating that there is often disagreement among the commissioners on this topic)
  • Any changes to the MAT process (like the CFTC being more involved) would not happen until later next year but it is on their radar
  • Position limits – acknowledged that SEFs cant readily do this, as a “contract” trades on many SEFs. It was either the Chairman or a later CFTC panelist that basically said “its a rule, so you have to comply, but you can comply by just telling us that its too hard to comply”
  • Gave guidance that they will soon comment on straight-through-processing. How this impacts me (and you the consumer of data) is that there continue to be trade reports done (and trades sent to clearing) hours after execution, all because trades are caught up in middleware waiting to be confirmed. When you consider many of these are vanilla swaps traded on-screen, why the holdup?
  • Expressed general leniency for other recent CFTC requirements such as cyber-security. Fear being to let the SEF market grow before more requirements are imposed.
  • In the Q&A, the Chairman seemed to say that they will not be commenting or proposing rules on post-trade name disclosure.
  • No Chairmans speech is complete until he claims that they need more funding to do everything.

All in all, my takeaway was that they’re going to try and nail down some clarifications to rules and potentially codify some of them before SEF’s get permanent registration in early 2016.

Panel 3 – Congressman Sean Patrick Maloney

Always interesting to get a perspective from a member of congress. He is a democrat and claimed he’d be backing Hillary’s presidential bid (he served as an Advisor to Bill Clintons White House). As he represents New York, and given the importance of financial markets to the state, he straddles the Democratic party line of “Punish the banks” and the Republican “repeal Dodd-Frank” line. Tough job.

He quoted that we’ve recently spent $800 billion on fighting wars. That sounded low to me. A quick google of that factoid ranges from that figure on up to 4.4 trillion dollars. I suppose it depends on what you include.  Those numbers make it sound silly that the CFTC cannot get a few extra million to implement Dodd-Frank.

He is bullish that the government will not shut down and the CFTC will get more/better funding this year.

Panel 4 – Regulatory Outlook

Matt Kulkin of Steptoe & Johnson led the panel. Unique panel as it had two CFTC representatives – both Nancy Markowitz (Deputy Director of DMO) and Amir Zaidi (advisor to Commissioner Giancarlo).

Couple highlights:

  • Angela Patel from Putnam Investments claimed it would “Really Suck” if the CFTC did not approve a SEF they were using. Indeed it would – makes you realize there better be some advance warning.
  • I’ve lost track of where we are with the embargo rule. The rule says that a trade cannot be shown to participants until it has been reported to the SDR. Which means that in an order workup On-SEF, that the first leg has to be reported before it can be shown to SEF participants to work up (which would disrupt the workup process). However, if the trade is arranged in an introducing broker (away from the SEF) then the rule does not / can not apply as the trade is still in process. It’s still not clear to me if this is against the law, not in the spirit of the law, allowed, or given relief. If you subscribe to Giancarlo’s approach, you have to allow – and even encourage this. I tend to subscribe to his theory, as that is how swaps liquidity is formed in large size. I have to think this (delay reporting until workup is done) will be extended and permitted either by rule or relief for SEF registration.

The hottest exchange was between Nancy and Amir. If I was to summarize it, it went something like this:

Nancy (CFTC): “We’re going to tweak the rules by codifying some of the no-action relief”
Amir (also the CFTC): “That’s the wrong way to do it”

Probably not the best venue for the CFTC to squibble like that. But I can appreciate Nancy needs to formally register SEF’s and make immediate progress; and to do that she needs rules in place in order to validate SEF rule books and practices against. While Amir is echoing Commissioner Giancarlo’s preference for something closer to a re-write over “tweaks”.

On the bright side, it shows everyone’s opinions are being considered.

Panel 5 – Market Speak

Kevin McPartland always does a great job running panels. I was perhaps so engrossed that I seem to only have a couple notes from this session.

  • Agency SEF execution is still here, accounting for 0.5% of activity. Or maybe I saw that stat somewhere else on the day, but it sounded high.  EDIT:  This 0.5% was the amount of Tradeweb business that is agency traded.
  • Declan Graham of UBS responded to, and also asked, a few questions to the panel on agency execution. My takeaway is that its still not easy business for agency execution at this time. As a headline the order books are not making it easy or economical for firms to tap into SEFs via aggregators.
  • Bifurcated markets came up. Everything I have heard on this has been anecdotal and it continues. Scott highlighted a new case (for me) of FX Option liquidity being particularly impacted in the Asian & US overlapping hours, where there is distinctly separate pools of liquidity On-SEF vs the rest of the world. And this is for a permitted product dont forget.


To sum it up, in hindsight its been a fairly quiet year in SEFs, particularly if you compare the last 12 months with the previous 12. The efforts now are in the nuances – and tweaking – of the rules as SEF’s look to become officially registered with the CFTC. The upcoming challenges are then to take a step back and observe how all of these changes have impacted the market and to make changes to both improve them and make them compatible with other international efforts.

SEFCON 7 is right around the corner.

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