Boston, November 29, 2011 – A new report from Aite Group examines the Dodd-Frank Act’s creation of swap execution facilities (SEFs), and details the act’s intended purposes and shortcomings. The report analyzes the history of electronic trading in the over-the-counter (OTC) market, and provides advice for firms involved in U.S. electronic OTC derivatives trading in today’s post-Dodd-Frank environment.
The Dodd-Frank Act seeks to address issues of systemic financial risk through regulating the trading, clearing, and reporting of OTC swap transactions. To this end, it created the concept of SEFs as designated electronic trading platforms on which market participants can trade clearable swaps. Despite the Dodd-Frank Act’s best intentions, a number of hurdles remain around SEF implementation. Among the issues are unclear definitions and a lack of harmonization between the SEC and CFTC—the two domestic regulatory agencies charged with overseeing the OTC derivatives markets. SEF implementation currently faces headwinds similar to those encountered by electronically traded cash securities.
“This is an existential struggle for many segments of the OTC derivatives market, especially point-of-sale businesses,” says John Jay, senior analyst with Aite Group and co-author of this report. “Bid/ask spreads will compress further under SEF rules, but the lessening of systemic risk to the financial system will remain more dependent upon increased capital requirements, transaction-reporting rigor, the proper functioning of central counterparties, and consistent ongoing regulatory oversight than on the SEF portion of the Dodd-Frank Act.”
This 27-page Impact Note contains three figures and seven tables. Clients of Aite Group’s Institutional Securities & Investments service can download the report.