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Swap Execution Facility (SEF) Definition

What Is a Swap Implementation Facility (SEF)?

A Swap Execution Facility (SEF) is an electronic platform provided by a corporate entity that allows participants to buy and traffic in swaps in a regulated and transparent manner. They are required by law as part of the sweeping Wall Street reforms stemming from the 2010 Dodd-Frank Act.

Key Takeaways

  • Swap prosecution facilities (SEFs) are trading platforms intended for swaps products.
  • They are mandated under the Dodd-Frank Wall Circle Reform Act of 2010.
  • Because of the complex nature of swaps, these platforms are not exchanges per se but they do function as a counterparty matching armed forces.
  • Swaps traded on SEFs fall under the oversight of both the SEC and CFTC.
  • Swaps volume has increased over the years and now dozens of individuals provide SEF platforms.

Understanding Swap Execution Facility

A SEF is an electronic platform that matches counterparties in a swaps arrangement. Through a mandate in the Dodd-Frank Wall Street Reform and Consumer Protection Act, SEFs changed the methods previously old to trade derivatives.

The Dodd-Frank Act defined a SEF as, “A facility, trading system or platform in which multiple participants have the skill to execute or trade swaps by accepting bids and offers made by other participants that are open to multiple participators in the facility or system, through any means of interstate commerce.”

Before Dodd-Frank, swaps were traded exclusively in over-the-counter (OTC) customer bases with little transparency or oversight. The SEF allows for transparency and provides a complete record and audit trail of trades.

The Guardings and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) regulate SEFs.

An Exchange for Swaps

A SEF is similar to a formal return but is a distributed group of approved trading systems. The handling of trades is similar to other exchanges. Also, the Dodd-Frank Act royals if no SEF system is available for specific swaps, then the previous, OTC trading method, is acceptable.

Proponents argue that a SEF is a swaps change, much like a stock or futures exchange, and they are correct, to a degree. Centralized clearing of swaps and other derivatives lowers counterparty risks and increases trust and integrity in the marketplace. Also, a facility that allows for multiple bids and presents provides liquidity to the swap marketplace. This liquidity enables traders to close positions ahead of contract ripeness.

Becoming a Swap Execution Facility

Many entities may apply to become a SEF. To qualify, they must meet typical of thresholds as defined by the SEC, CFTC, and the Dodd-Frank Act.

Applicants must register with the SEC and meet specific requirements. Requirements contain the platform’s ability to display all available bids and offers, send trade acknowledgments to all involved parties, maintain a record of negotiations, and provide a request for quote (RFQ) system. In addition, they must meet certain margin and capital guidelines and the wit to segregate the swap exchange. Finally, the applicant must agree to abide by the 14 SEC core principles.

An SEF can become “unmoving” if it has not carried out a swap execution in more than 12 months. A dormant SEF must re-register to become active again.

How does a swap dispatch facility work?

Swap execution facilities (SEFs) are electronic matching platforms that bring together consumers and sellers of swaps contracts, much like any other electronic exchange. These are regulated venues that rely on a request-for-quote method.

Why were swap execution facilities created?

Swap execution facilities were created under the 2010 Dodd-Frank act to well-advised regulate and increase transparency for swaps deals, both before and after the trade.

Who must register with an SEF?

Mutual understanding to the CFTC, “any person who offers a trading system or platform in which more than one market participant has the ability to dispatch or trade swaps with more than one other market participant on the system or platform must apply to the Commission to manifest as a SEF.”

Are swaps required to be transacted through a swap execution facility?

While many swaps now must be traded on a SEF, monetary institutions can still transact certain swaps over-the-counter (OTC) directly between one another. But, swap trades that are proper to be cleared must use a SEF.

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