The Asset Management Group of SIFMA (“SIFMA AMG”) submitted comments to the CFTC renewing a January 13th request for no-action relief as to the CFTC’s compliance date for mandatory trading on SEFs.
In response to the CFTC’s request for an explanation as to why SEF trading should not be made mandatory, the trade association listed 17 major issues, some of which were both operational and legal (see pages 2-4 of the letter).
Lofchie Comment: Craig Pirrong (also known as the Streetwise Professor) describes the mandate for firms to trade on Swap Execution Facilities as the worst provision in Dodd-Frank (see linked article). Though that is arguable, he does explain why SEF trading adds no protection against systemic risk. More troubling is the process by which this mandate was adopted. There may be no provison of Dodd-Frank adopted with such little care for its effect on the market. The CFTC justified its very low standard for forcing trading onto SEFs by stating that the low standards were intended to ease the cost burden on SEFs. This justification, however, did not regard the cost burdens on firms that would be required to trade on SEFs, not to mention the impact to the economy as a whole. The problems that were at all times obvious to knowledgeable market participants are now becoming obvious to all: the rules won’t work and the timetables can’t be met.
Rather than extending the deadline, the CFTC should rethink the entire SEF process. For the Commission to force interest rate swaps and other swaps that are commonly used for hedging onto automated exchanges, where the rules are moving pieces and the operational processes are moving even faster, seems genuinely imprudent. What happens if there are material problems? Who bears responsibility?
See: Comment Letter.