Swaps End-User Update: What End Users Need To Know About Swap Execution Facilities (SEFs)

Author:Mr Karl Strait, John S. Servidio and Richard W. Viola
Profession:McGuireWoods LLP

A new day dawns for end users in the brave new world of swaps regulation. Swap execution facilities (SEFs) began trading on Oct. 2, 2013, and anyone who enters swaps via a SEF must comply with certain onboarding requirements, including entering a participant agreement and delivering other documents, to continue trading on a SEF after Oct. 31, 2013.

Many end users of swaps have expected that so long as they are not required to clear the swaps they trade, they are not required to trade their swaps on a SEF. As those end users may be discovering, this expectation is not necessarily correct.

So, what is a SEF?

A SEF is an exchange-like trading system or platform on which multiple buyers and sellers have the ability to execute or trade swaps, sometimes referred to as a "multi-to-multi" trading system. Under the Commodity Exchange Act (CEA), "no person may operate a facility for the trading or processing of swaps unless the facility is registered as a swap execution facility..." (emphasis added). As a result, every multi-to-multi trading system for swaps must register as a SEF.

Why do SEFs matter to end users?

Most end users were aware that if a swap is required to be cleared by a designated clearing organization (DCO), it also is required to be entered on a SEF. However, end users, many of whom expect to be able to elect the end-user clearing exception for any swaps otherwise required to be cleared, also expected that they could avoid having to execute their swaps on a SEF. This is not the case if an end user intends to use a multi-to-multi trading platform to enter swaps. In other words, since Oct. 2 SEFs are the only multi-to-multi trading platforms available for trading swaps, even uncleared swaps.

Of course, spot FX transactions and FX swaps and forwards that are not swaps under the CEA can still be traded on non-SEF multi-to-multi platforms (provided that the counterparties comply with applicable business conduct standards and swap documentation and reporting rules). However, as a practical matter, not all FX trading platforms are maintaining separate non-SEF FX trading.

The import of all this for end users is that trading on a SEF requires either becoming a SEF participant or trading through a third party who is a SEF participant.

What should end users do now?

As always, it depends.

End users who do not enter swaps on multi-to-multi platforms, or who are willing to now forgo doing so, do not necessarily need to do anything. Those end users...

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