Non-US platforms shun US banks over Sef rules headache

Isda conference in New York hears some trading platforms outside the US are turning away US persons to avoid registering as a Sef

Trading platforms outside the US are turning away US market-makers because of a requirement that they register as a swap execution facility (Sef) even if they do not trade products subject to the Dodd-Frank Act's Sef-trading mandate, according to market participants. The safest way to avoid that burden is to shut out US-regulated entities.

The Commodity Futures Trading Commission (CFTC) released final Sef rules on May 16, and requirements to register as a Sef come into effect on October 2. Footnote 88 of the rules requires a platform to register as a Sef if it ticks the same boxes as one of the act's new venues – a multiple-to-multiple platform – even if it does not trade swaps that are mandated for execution on a Sef. Some non-US platforms have no intention of registering as a Sef and are now warning users designated as US persons – and therefore subject to the Dodd-Frank Act – that they will not be allowed to trade on the platform after the Sef registration deadline. That includes the non-US arms of US banks, which can be significant providers of market-making muscle.

"They won't trade with US persons and it is very clear that branches of US banks are US persons and some [platforms] have taken the position that they won't trade with a non-US person guaranteed by a swap dealer," said Diane Genova, general counsel for global markets at JP Morgan, speaking at a conference in New York held by the International Swaps and Derivatives Association. "Some Sefs have already begun to tell US participants that once the registration requirements go into effect they will not be allowed to trade on the facility."

In Europe, this means the loss of liquidity provided by US banks, said Michael O'Neill, a managing director at Bank of America Merrill Lynch (BAML). But JP Morgan's Genova warned emerging markets will be hardest hit.

"In some markets, such as emerging markets, it could have dramatic effects on market liquidity and it doesn't really promote the CFTC's objectives because in emerging markets they are not dealing with transaction types that need to be traded on a Sef – they have to register even though there is no Sef execution requirement. The logic isn't there," she said.

Some Sefs have already begun to tell US participants that once the registration requirements go into effect they will not be allowed to trade on the facility

Europe is developing its own rules for electronic execution but these are unlikely to be in place for some time. This removes the ability for an agreement between regulators based on substituted compliance – where platforms adhering to European rules could be exempt from registering as a Sef. Genova said there is "zero chance" of a delay to the October 2 registration deadline but argued the CFTC could still offer some relief.

"What could happen, so as not to affect Sef registration on October 2, is to limit Sef registration outside the US to those Sefs that are offering required products – those that are required to be traded on a Sef. And also a confirmation that Sefs can deal with institutions outside the big-six jurisdictions without having to register as a Sef," Genova said.