According to Professor Pirrong, Swap Execution Facilities (SEFs) are the “solution in search of a non-existent problem.”
According to Professor Pirrong, SEFs are the “solution in search of a non-existent problem.” Professor Pirrong explained that, in crafting SEFs, regulators took a narrow, one-size-fits-all approach by assuming that centralized order-driven markets were the best way to execute all transactions. In doing so, Professor Pirrong stated, regulators focused on pre-trade and post-trade transparency even as they “totally overlooked the importance of counterparty transparency.”
Every financial market, according to Professor Pirrong, has a diversity of trade mechanisms, since various types of trades and traders are more efficiently suited for different levels of transparency and disclosure. Dodd-Frank, or “Frankendodd,” as Professor Pirrong calls it, created SEFs in an attempt to establish “a monoculture and impose a standardized market structure for all participants.”
Lofchie Comment: The notion that increasing SEF volumes indicates that use of SEFs is being welcomed is odd in terms of transactions in which SEF use is mandated. It’s a bit like claiming that people enjoy paying taxes simply because they do pay their taxes. Given the alternative, obviously, many swaps parties would prefer not to use SEFs.
See: “SEFs: The Damn Dogs Won’t Eat It!” by Craig Pirrong, Streetwise Professor.