DerivAlert Blog

Senate Debate Heats Up Over Definition of Swap Execution Facilities

In an effort to promote electric trading of swaps, Senators Tom Harkin (D-IA) and Maria Cantwell (D-WA) have recently filed an amendment to change the definition of "swap execution facility" to mean "an electronic trading system with pre-trade and post-trade transparency in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by other participants that are open to multiple participants in the system, but which is not a designated contract market." The new language, which is similar to the definition used in the Restoring American Financial Stability Act of 2010, promotes transparency in the swaps market by requiring that trades are executed on registered swap execution facilities (SEFs) or exchanges, and cleared via central clearing houses.

While  most swaps currently are traded via phone, electronic trading is already on the rise as market participants take advantage of the benefits of electronic trading, such as greater efficiency and transparency. If the legislation passes, the industry will see an additional growth spurt in electronic trading and in the number of SEFs and exchanges serving this market.

At the moment, the Senate is debating its version of the financial regulation reform bill, which will get wrapped into the one passed earlier by the House. It remains to be seen whether Harkin's and Cantwell's amendment for SEFs survives the final edition, however, it is expected to be an important arguing point in the debate. Electronic trading is critical for increasing efficiency and transparency in the swaps markets.