SEF Situation: As MiFID II Looms, Harmonization Necessary

Hello and welcome to my little corner of WatersTechnology for the foreseeable future.

First, I think, an introduction is in order. My name is Dan DeFranceso, and I've been with WatersTechnology for just over a year, joining the team as a US staff writer in August 2014. Since then, I've written about everything from the Consolidated Audit Trail (CAT) to the battle over young technologists and BCBS 239, with a handful of profiles of C-level executives on the buy and sell side scattered in there, too.

Prior to joining WatersTechnology, I spent just over two years at The Journal News, a daily newspaper that covers New York's Hudson Valley, as a sports reporter. It's a unique jump to go from covering college basketball games to colocation, but one I've enjoyed.

Before we get into it, I should note what happened to my predecessor. Anthony Malakian, WatersTechnology US editor, is still very a much a part of our team. He's simply passed the responsibilities of the Sell-Side Technology deputy editor on to me.

So don't worry. That big beautiful beard of his will continue to be a staple of WatersTechnology events.

SEF: Rough Waters Ahead

Speaking of events, last week marked the sixth installment of Sefcon, a conference focused on the status of swap execution facilities (SEFs). This year was particularly interesting with the implementation of MiFID II now just over a year away.

A hot topic at the conference was the possibility of mutual recognition of regulations for the swaps market between between the US and Europe.

Naturally, US Commodity Futures Trading Commission (CFTC) chairman Timothy Massad painted a picture of optimism in his keynote address: The US and Europe are working closely together to recognize each other's trading platforms. Mutual recognition is critical. Everyone shares the same overall goals.

However, a panel featuring executives from five different SEFs had a drastically different outlook. As Rick McVey, chairman and CEO of MarketAxess, put it, "My guess is that that horse has left the barn." Jamie Cawley, CEO of BGC SEF, added that the focus needs to be on straightening out domestic regulations before moving to global harmonization.

It's clear the two sides have very different views on the swaps market and where it's headed in terms of regulation. Now, I'm not going to sit here and say I can solve the problem or have all the answers. I certainly don't. However, something needs to be done.

That's easy for me to say as someone that doesn't run or regulate a SEF, but SEFs could take a bit hit in January 2017, when MiFID II kicks in, if there isn't some type of plan in place to recognize different regions' regulations. 

Let's be honest, SEFs aren't exactly in a great place right now. Fragmentation and liquidity is an issue. Sure, they've showed growth since their inception two years ago, but it's clear there is still a long way to go. Massad even admitted so, mentioning that while the CFTC is looking at adding new regulations to some markets, SEFs would be given an exemption on some, at the moment, to allow them time to grow.

I'm not trying to portray Jan. 3, 2017, as doomsday for SEFs, but once those European regulations kick in, if some type of global harmonization hasn't been figured out, SEFs could see a significant hit as European firms, worried about remaining compliant with their own region's swaps market, exit SEFs.

Nowhere to Run

To open his keynote address, Massad said the concept of global harmonization reminded him of the classic joke of the two campers who come across a bear.

The first camper takes off running while the second camper calmly puts on his running shoes. The first one stops and asks the second one why he is putting on running shoes since there is no way he can outrun a bear, to which the second replies, "I don't have to outrun the bear. I just have to outrun you."

It's always nice to see a regulator have a laugh, but this might not be the best approach toward getting mutual recognition of regulations in the global swaps markets. Massad was quick to hedge his joke, saying to not read too much into it, there's no bear in the swaps market and no one's trying to outrun anyone, he said.

But maybe MiFID II is that looming bear in the forrest. And if it's not addressed, then everyone ─ no matter how fast ─ is going to get hurt.

Food For Thought

-Grantland closed its doors after four years of existence on Friday. As a big fan of long-form journalism and the molding of sports and pop culture, I was sad to see it go. I think, in its death, people have gone a bit overboard in considering it one of the best sports/pop culture websites on the internet, but it did produce some great content. I highly recommend this piece on the decline of NBA talent emerging from New York City.

-The beginning of the month marks the release of our features. We have some great ones on stuff like blockchain, data lakes, mergers and foreign exchange. However, this is my column, so I'm going to plug my feature because I'm selfish. Check out my profile on Northern Trust CIO Scott Murray. The story dives into some future plans the Chicago-based firm has for its technology, as well as Murray's calculated decisions that led him to his current position.

-Yes, I am a Mets fan. No, I don't want to talk about it.

-In case you missed it, the shortlists for the American Financial Technology Awards 2015 have been announced. Check it out here. Winners will be announced December 7 in New York. Prior to the awards will be our Waters USA event. Click here for more information.

-I'm a big fan of commercials. I know, sounds weird, but a well-constructed advertisement goes a long way. Anyway, check out this latest Nike spot. If nothing else, it gives us a glimpse into the potential acting career of Rob Gronkowski. 

Like the column? Hate the column? Let me know via email (dan.defrancesco@incisivemedia.com) or Twitter (@dandefrancesco).