Not with a bang

IT WAS not the smoothest of starts. Swaps-market participants began to trade standardised derivatives on new electronic platforms called Swap Execution Facilities (SEFs) on October 2nd. Forcing over-the-counter derivatives trades—contracts that are transacted away from the gaze of regulators—on to visible trading platforms has long been a goal of world leaders keen to reform a shadowy market which they blame for the crisis in 2008. But inaugurating the new platforms could scarcely have been more chaotic.

The past few weeks have seen a flurry of applications for SEF status. There are almost 20 platforms in this newly competitive market, including established operators of electronic markets such as Bloomberg, futures exchanges like IntercontinentalExchange, brokers (GFI Group), and new start-ups like Javelin Capital Markets. Some will offer a range of derivatives contracts, others will specialise.

America’s, and hence the world’s, main derivatives regulator, the Commodity Futures Trading Commission (CFTC), published voluminous rules last summer on how the platforms were to work. To trade swaps, electronic platforms would have to be registered with the CFTC by October 2nd this year. A registered SEF would have to set up a central order book to maximise price transparency as well as be able to transmit information on transactions promptly to central clearing-houses and data repositories. Above all it would need to create and enforce rules on which all traders must agree.

Two uncertainties fogged this process. One is that there was a gap between the date on which SEFs had to be registered and that on which the most common sorts of derivatives had to be traded on them (a deadline that will probably arrive in early 2014). Existing trading venues assumed they need not worry about registering as an SEF until the later date.

Imagine their surprise when they stumbled belatedly on footnote 88 in the CFTC rules, which said that multilateral trading venues for swaps all had to be registered as SEFs from October 2nd. This prompted a flood of demands for an extension of the deadline, accompanied by dark hints that existing trading might otherwise revert to bilateral dealmaking over the phone, “potentially throwing a significant amount of sand in the gears of what has been a pretty efficient market,” according to Robert Pickel of the International Swaps and Derivatives Association, a trade body.

Gary Gensler, the chairman of the CFTC, stood firm in pursuit of the keener prices and increased liquidity that he expects SEFs to bring. But faced not just by industry protests but also by the complication of America’s federal-government shutdown, which began the day before SEFs revved up, the commission issued a spate of temporary approvals. It also gave the platforms an extra month to sign up market participants and two months to start reporting data on certain swaps.

The other uncertainty stemmed from long-standing European unease about America’s extraterritorial ambitions. In CFTC theory, all trading platforms, including European Multilateral Trade Facilities, must be registered if they wish to do business with Americans. Many bridle at having to seek approval from an American regulator—and one of the humbler ones at that. Some platforms are said to be kicking off Americans until matters are clearer. Michel Barnier, the EU commissioner responsible for financial services, wrote to Mr Gensler on September 30th, reminding him of a transatlantic agreement in July to work together on jurisdictional disputes and urging him to give European actors more time to register.

Given this halting start, it is no surprise that the arrival of SEFs was not a Big Bang. Volumes traded on the platforms’ first day seem not to have been exceptional. “The government shutdown had a bigger effect on the swaps market than SEFs did,” says Kevin McPartland of Greenwich Associates, a consultancy. Trading is not likely to rise significantly until SEFs become mandatory for certain contracts. But this week is still a big step towards a big goal: the emergence of a $630 trillion market into something like sunlight.