One of the mandates of the 2009 G20 summit was to ensure the electronic trading and central clearing of standardized OTC derivatives. OTC, or “over-the-counter,” is seen as the antonym to exchange-traded, or “listed,” assets in most literature. Now global regulators seem intent on removing OTC from the trading landscape.
Shifting bilateral OTC activity onto electronic platforms -- organized trading facilities (OTFs) in Europe and swap execution facilities (SEFs) in the U.S. -- is the way regulators plan to achieve this paradigm shift. It is expected that a final rule on SEFs will be published soon by the U.S. Commodity Futures Trading Commission (CFTC) to see electronic trading of standardized derivatives become a reality in the first half of 2013. Interestingly, though, the corresponding regulation in Europe is not part of EMIR; rather, it is part of the overhaul of the Markets in Financial Instruments Directive (MiFID II), which is not due to enter into force before 2015.
Despite regulators’ demand for new trading venues, there are also skeptical voices in the market, which discuss the death of SEFs before they have even started. In a recent TABB Group research report, TABB’s Adam Sussman points out that a staggering 29 firms have announced their intentions to become SEFs. But he sees designated contract markets (DCMs) as better positioned, as they can trade swaps next to a host of other instruments, whereas SEFs can only trade swaps.