Swap Execution Facility (SEF)

What Is a Swap Execution Facility (SEF)?

A Swap Execution Facility (SEF) is an electronic platform given by a corporate entity that permits participants to buy and sell swaps in a regulated and transparent way. They are required by law as part of the broad Wall Street reforms originating from the 2010 Dodd-Frank Act.

Figuring out Swap Execution Facility

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

The [Dodd-Frank](/dodd-frank-financial-administrative reform-charge) Act defined a SEF as, "A facility, trading system or platform in which numerous participants can execute or trade swaps by accepting bids and offers made by other participants that are available to different participants in the facility or system, through any means of interstate commerce."

Before Dodd-Frank, swaps were traded solely in over-the-counter (OTC) markets with little transparency or oversight. The SEF takes into consideration transparency and gives a complete record and audit trail of trades.

The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) direct SEFs.

An Exchange for Swaps

A SEF is like a formal exchange however is a distributed group of approved trading systems. The treatment of trades is like other exchanges. Likewise, the Dodd-Frank Act states in the event that no SEF system is accessible for specific swaps, the previous, OTC trading method, is acceptable.

Defenders contend that a SEF is a swaps exchange, similar as a stock or futures exchange, and they are right, to a degree. Centralized clearing of swaps and other derivatives decreases counterparty risks and increases trust and integrity in the marketplace. Likewise, a facility that considers various offers and offers gives liquidity to the swap marketplace. This liquidity empowers traders to close situations ahead of contract maturity.

Turning into a Swap Execution Facility

Numerous substances might apply to turn into a SEF. To qualify, they must meet specific edges as defined by the SEC, CFTC, and the Dodd-Frank Act.

Candidates must register with the SEC and meet specific requirements. Requirements incorporate the platform's ability to display every accessible bid and offers, send trade affirmations to every single included party, keep a record of transactions, and give a request to quote (RFQ) system. Moreover, they must meet certain margin and capital rules and the ability to segregate the swap exchange. At last, the candidate must consent to keep the 14 SEC core principles.

A SEF can turn into "dormant" on the off chance that it has not carried out a swap execution in over 12 months. A dormant SEF must re-register to become active once more.

Features

• Swap execution facilities (SEFs) are trading platforms expected for swaps products.
• Swaps volume has increased over the years and presently many substances give SEF platforms.
• Because of the complex idea of swaps, these platforms are not exchanges fundamentally however they really do function as a counterparty matching service.
• Swaps traded on SEFs fall under the oversight of both the SEC and CFTC.
• They are commanded under the Dodd-Frank Wall Street Reform Act of 2010.

FAQ

Who must register with a SEF?

As per the CFTC, "any person who offers a trading system or platform in which more than one market participant can execute or trade swaps with more than another market participant on the system or platform must apply to the Commission to register as a SEF."

How does a swap execution facility function?

Swap execution facilities (SEFs) are electronic matching platforms that unite buyers and sellers of swaps contracts, similar as some other electronic exchange. These are regulated scenes that depend on a request-for-quote mechanism.

Why were swap execution facilities made?

Swap execution facilities were made under the 2010 Dodd-Frank act to better direct and increase transparency for swaps bargains, both before and after the trade.

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

While many swaps currently must be traded on a SEF, financial institutions can in any case transact certain swaps over-the-counter (OTC) straightforwardly between each other. However, swap trades that are eligible to be cleared must use a SEF.