On SEFs, a Delay Seems Necessary

There are many reasons why it would make sense for the Commodity Futures Trading Commission to push back the Oct. 2 deadline for SEF registration and compliance. There's some legal confusion, extraterritorial concerns overseas, and numerous instances of needing clarity and specifics when it comes to the rules.

But perhaps the greatest reason has to do with technology—in this case, whether firms will have the best technology in place in time. Look no further than the various trading incidents that have rocked the markets in the past couple years where the source of the problem was traced to technology problems of some kind. Last year, a software glitch that was caused by improper coding marked the end of Knight Capital. Nasdaq and NYSE are considering joining forces to combat technology glitches, which have been especially prevalent of late at the exchange level. A computer glitch cost Goldman Sachs millions of dollars this summer.

For this and other reasons, the Securities Industry and Financial Markets Association (Sifma), through its Asset Management Group (AMG), sent a letter to the CFTC earlier this week asking for a delay, joining a chorus of other voices pleading for the same thing.

Some of their reasons seem a bit overblown. But one that is not is the fact that asset managers and other trading participants have not had nearly enough time to properly code and test their connections to the various SEFs that have already gained approval from the CFTC, and those who are still waiting for the CFTC's official nod to launch their own SEFs.

And because of Footnote 88 in the CFTC's final rules, there may be even more venues that will have to register as SEFs, which means those companies would have to rush through creating a SEF infrastructure, and participants would have to quickly code and connect to those venues.

When the CFTC released its final rules in June, it set an ambitious deadline for registration and compliance. All too often on Wall Street, the trading firms cry that there's simply not enough time to get compliant with new rules, but while it's true that sometimes these firms are simply looking to create delays to buy more time to fight against these reforms, in this case there are major IT concerns that have not properly been addressed.

These rules are designed to bring transparency to the opaque over-the-counter (OTC) derivatives market, and that's a good thing. But there is still much that needs to be worked out.

Fortunately, it sounds as if a delay is on the table. Speaking at Futures Industry Association (FIA) conference in Switzerland yesterday, CFTC commissioner Scott O'Malia agreed with the voices of other industry participants that the deadline needed to be pushed back, according to an FT report.

"If the commission wants to foster a robust, competitive landscape for SEFs, it must be flexible enough to adjust the compliance date based on market and technology realities, and not stick with an unworkable date simply to adhere to an individual agenda," he said.