Feb 6, 2015

With the recent release of the European Securities Markets Authority (ESMA) technical standards and advice on MiFID II, the area of electronic trading obligations for OTC Derivative market participants is back on the agenda. OTC Derivative trading requirements were omitted from the EMIR legislation but are now covered in MiFID II, completing the 2009 G20 Pittsburgh summit obligations for the EU. However, Swap Execution Facilities (SEF’s), the US equivalent of the European OTF (Organised Trading Facility) have been around since the Dodd Frank Act was written into legislation in 2010. Here are some specific areas worth considering when planning your SEF and new MiFID II OTF change projects.

The 5 pre-trade areas to consider about SEF’s:

(1) There is a long lag from law to launch: despite the Dodd Frank Act coming into law in July 2010, the first SEF’s were only launched in October 2013.

(2) There are three broad categories of SEF’s: the first group is composed of SEFs operated by traditional exchanges. The second category consists of interdealer brokers (IDBs), and trading platform companies operate the third category.

(3) There is considerable competition: there are currently 17 SEFs that are “temporarily” registered and three more that are pending registration.

(4) There are transaction reporting obligations: SEF’s have the responsibility to report transactions directly to the registered trade reporting repositories on behalf of users of the platform.

(5) There is a long lag from launch to volume: agreeing what are sufficiently standardised Derivatives; agreeing the rule books that all users of SEF’s are bound by; inconsistent timing and rules across Europe and the US, have all led to slow take up of SEF’s in the US.

The 5 post-trade areas to consider about SEF’s:

(1) Reduced pressure on regulatory reporting operations teams: trades are reported directly by SEF’s to registered trades repositories, the reporting burden on operational teams is reduced.

(2) Reduction in the number of outstanding trade confirmations: SEF executed trades should be able to be fully electronically confirmed and matched without breaks due to standardised terms and automated trade capture.

(3) Increased timeliness of confirmation execution: automated connectivity between systems, counterparty participants (sell-side, buy-side, central counterparties (CCP’s)) will speed up legal execution timelines.

(4) Improved quality and accuracy of transactions: this will reduce both breaks and inefficiencies in functions further downstream; Unique Swap Identifier (USI) matching, trade pairing, settlement and collateral.

(5) Reduced number of reconciliations: reconciliations throughout the operational support model will reduce, however, there will be a greater reliance on single large reconciliations to SEF’s and trade reporting repositories. These including, integration, connectivity, process re-engineering, and greater reliance on golden source static data will require change investment and planning.


Despite ESMA publishing its consultation late last year, MiFID II does not come into effect until January 2017. It is still uncertain the time it will take substantial trade volume to move to SEF’s before Europe goes live, and consequently when market participants can capitalise on the operational cost and efficiency benefits of electronic trading. However, what is certain, planning and change management investment now will allow market participants to quickly manage and realise the benefits when the fire hose is turned on.