By Andrew Cross and Tom Watterson
In our post from last week, we described which interest swaps will be covered by the SEF trading mandate which will come into effect February 15, 2014. This post will lay out some steps that you should be taking to prepare to trade on SEFs.
As an initial matter, when the concept of SEFs arose during the Dodd-Frank discussions and rulemakings, most observers (including TSR) believed that participants would access their SEFs through an agent, such as an FCMs, much like the futures market (at some points called the "sponsored access model" and now considered the "non-participant access model"). However, as far as we have seen, the models allowing for participants to access SEF platforms through their FCMs are still under development and will not be finished before February 15, 2014. As a result, in order to enter into most interest rate swaps (see the list of Covered Swaps in our prior post), an entity will have to become a participant on a SEF.
Now, you may be thinking that certainly the CFTC would not impose a trading mandate before the market has figured out how to provide what was once thought to be the primary access model for SEFs? Unfortunately, it does not appear that the CFTC is willing to slow down the mandate.
So, what do you have to do over the next several weeks to make sure that you can trade interest rate swaps on February 15?
- Identify how you are currently trading pre trade allocation, post trade allocation, or trade by trade; how the traders access their trading platforms (voice, GUI); packaged trades or single trades
- Contact SEFs – request paperwork to become a participant
- Contact your FCM (FCM must be set up with the SEF)
- Have legal team begin review of documents, rulebooks
- Contact traders to begin to determine how much trading can be done by February 14 before the trading requirement, this could by you some time if you do not have to enter into any trade right away
- Contact operations and technology departments regarding order processing and system requirements (based on information from your FCM and SEF)
- Connect operations/technology with appropriate persons at SEFs and FCMs – the operations and technical set-up may be the most difficult part of this process
- Identify who will be the SEF participant (each client/fund, the asset manager) this will depend on how you trade and which SEFs you are accessing
- Begin onboarding process for SEFs – Operations and legal
- Finish operation/technology set-up
- Begin to submit test trades
- Continue testing the trading systems
- Transfer all trade order flow onto SEF platforms
February 15 (Well, February 18th, after giving effect to weekends and holidays)
- Hope the market and liquidity remains in tact enough to continue trading
Good day. Good luck! TSR