CHICAGO--(BUSINESS WIRE)--New derivatives trading platforms receiving temporary U.S. regulatory approval for launch are likely to improve pricing transparency for traders of interest rate swaps and other credit derivatives, according to Fitch Ratings. Designated swaps execution facilities (SEFs) could, over time, begin to generate meaningful revenue streams for firms offering voice and electronic execution of derivative transactions, as required under Dodd-Frank.
However, we believe that in the near term, regulatory uncertainty around SEF rules, namely definition of 'required' and 'permitted' transaction and cross-border treatment, could dampen liquidity, affecting volumes and ultimately revenues.
SEFs will provide an electronic trading platform for counterparties that are required to move all standardized over the counter (OTC) derivative transactions onto centrally cleared platforms. We see this as an important step in allowing swap participants to more easily gain access to pricing data. This should ultimately contribute to more efficient interest rate swap and CDS market activity.
As of Sept. 25, a total of 18 institutions submitted applications to the Commodity Futures Trading Commission (CFTC) to operate SEFs. So far, 13 firms have received temporary registration approval. Included among these are BGC Partners Inc. and GFI Group Inc, two Fitch-rated inter-dealer brokers (IDBs). Bloomberg was the first organization to gain temporary approval as an SEF operator in July.
CFTC Chairman Gary Gensler noted at a conference last week that applications by prospective SEFs were receiving only "cursory" reviews, suggesting that more participants are likely to emerge before the Oct. 2 application deadline.
Given the relatively large number of prospective competitors in the SEF space, Fitch believes the SEFs that attract the most liquidity and are dominant in a specific asset class will gain market share over time. For some smaller IDBs, high regulatory and operational cost hurdles may have discouraged entry and could lead to industry consolidation.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.