SEF Rules Are Trouble for Asian Derivatives Markets

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According to Reuters, many Asian and U.S. banks are looking for ways around new rules implemented by the Commodity Futures Trading Commission and other regulators. Some fear their maneuvers may lead to liquidity shortages within the market.

While regulators are trying to round up all derivatives trading onto new Swap Execution Facilities (SEFs), a mere 10 to 20 percent of Asia’s turnover in currency and interest rate derivatives are currently going through SEFs, while the vast majority are being settled either in the wider market or bilaterally. Breaking up liquidity in this manner is making it difficult for investors looking to hedge portfolio risk.

In response to the CFTC mandating all trading over $8 billion (per year) with American counterparties must be done over SEFs, Asian derivatives market traders are severely limiting their trading with U.S. participants in order to stay under the $8 billion dollar threshold.

US banks are doing their best to find loopholes in the SEF rule, trying not to be left out of the expanding Asian derivatives market. Some are offering to use their London subsidiaries to keep Asian derivatives market traders from having to pay higher brokerage fees.

Regulators are concerned that the SEF rules may lead to a “Balkanization” of the market, and warn that these rules and the costs they create may cause more trading to be done outside of SEFs, creating less transparency within the market and undermining the purpose of their institution altogether.