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Agenda

 Trade processing SEF market utility func MarkitSERV business description Business environment Interpretation of SEF definition under the  Implications of the scope of SEF function The "Trading Requirement" waterfall Categories of SEFs – trading, execution  SEF Diagram Matters to consider in rulemaking Business conduct standards – confirmat Regulatory reporting / public reporting Appendix A: Table with SEF categories u
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Trade processing SEF markfunctions

 Summary

– Perform trade processing (pre-confirmation and 

services)

– Fulfill the “Trading Requirement” for illiquid and 

negotiated swaps

– Ensure transparency– Electronically confirm all swap transactions– Maintain an audit trail– Provide position aggregation functions– Perform regulatory and public reporting
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MarkitSERV business descr

 A trade processing facility

– Facilitates electronic confirmation and affirm– Maintains an audit trail of trades and aggreg

 MarkitSERV processes

– 99% of all credit default swaps for major pa– 77% of all interest rate swaps for major part– 36% of all equity derivatives for major partic– Growing percentage of other commodity de

 Interconnection for

– 70 dealers, 70 inter-dealer brokers and 1,90

– Clearing houses– Execution platforms and facilities– Swap data repositories– System vendors
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Business environment

 Transition from paper and fax confirmati

confirmation

 Greater legal certainty of contract terms Drive toward almost instantaneous confi Drive toward straight-through-processing  Ability of market participants to monitor t

execution and life-cycle events

 Ability to report transactions and maintai
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Interpretation of SEF definitithe Dodd-Frank Act (DFA)

 Definitional section in the DFA (§ 721)

– Appears to cover only “trading facilities” a

execution and trading facilities.

BUT

 Registration / operative provisions sectio

– Requires any entity that operates a facility 

processing of swaps must register.

– Note, this provision does not require a SE

entity” that conducts regulated activities, s

processing of swaps must register. 

 The CFTC has the authority to further de MarkitSERV is a classic example of a “t
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Implications of the scope of functionalities

 Compliance with the "Trading Requireme

– For cleared swaps -

 trade or trade process swaps on a SEF or a  provided that SEF or DCM makes them avai

specific designation)

 Implications

– The broader the definition of SEF: 

 the broader the functionalities that SEFs can  the more entities covered and supervised un

 the more swaps traded, executed and trade 

– The narrower the definition of SEF:

 the opposite is true

 Suitability of SEF or DCM for “trading”

– Several illiquid futures contracts failed in th– Inherent lack of liquidity for some swaps
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The "Trading Requirement" 

Trading Facility SEF Multiple-

Trading 

If not enough liquidity or 

cannot "trade"

Execution Facility SEF RFQ, ne

executio

If not enough liquidity or 

cannot "execute"

Trade Processing 

Facility SEF

Trade p

confirmati
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Categories of SEFs

 Based on the DFA language, the followin

SEFs:

– Category I – “Trading Facility SEF”

 Essentially equivalent to an exchange, open  Eligible to fulfill the "Trading Requirement"

– Category II – “Execution Facility SEF”

 An RFQ, inter-dealer system, many-to-many

other similar facilities where a binding swap i

 Eligible to fulfill the "Trading Requirement" if 

– Category III – “Trade Processing SEF”

 A trade processing / confirmation / affirmation  Eligible to fulfill the "Trading Requirement" if:

– swap cannot trade on or be executed on Catego– If non-competitively executed and posted on suc

 One entity can register and qualify as all 

register as any separate category: 

– All trades must be confirmed through Cate

categories of SEFs with Category III functi
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SEF diagram

Exchange-Type 

Trading

Negotia

Binding 

Trade Processing 

and Confirmation

Category I

Trading Facility SEF

Category 

Execution Fac

Category III

Trade Processing Facility 

SEF
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Matters to consider in rulem

 Definitions

– “trading”, “execution”, “trade processing”, “ma

any swap”; and “facilitate trade processing of 

 Unintended consequences

– Narrow definition of SEF will:

 Leave many facilities unregulated Limit participants’ ability to comply with the "Trad Reduce trade transparency below current levels

 Aggregation of positions

– An interconnected SEF can perform a critical 

open positions for swaps per asset category
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Business conduct standards confirmation of all trades

 Consider

– Requiring that all (either cleared or non-cleare

processed and electronically confirmed by swa

swap participants (between themselves and fousers)

– To follow the requirement of reporting of all sw

 Quality of data and legal certainty for all asse

– Requirement to confirm will ensure that transa

to open positions) is captured on all trade leveevents (e.g., novations, unwinds, amendments

corporate actions)

 Universal audit-trail

– This requirement will ensure that:

 all swaps will be accompanied with an audit-trail  in addition to the mandatory reporting requiremen
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Regulatory reporting / public 

 Differences in data capture between SEFs (w

functionality) and SDRs

– SEFs:

 Capture dynamic data, create an audit trail, docum

events 

– (e.g., detailed account statement for your checking ac

– SDRs:

 Capture a snapshot of an open position

– (e.g., monthly ending balance of your checking accou

 SEF of Category III

– Can act as a universal adapter for all other SE

DCMs, SDRs, swap dealers and major swap pmarket participants in fulfilling regulatory and pfunctions

– All trades on Category I or II SEFs must be co

Category III SEF or as part of their own Catego
Appendix A: SEF Categories 

(table attached)
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