With the deadline for mandatory execution of most OTC swaps through swap execution facilities (SEFs) months away, operators of the would-be trading platforms are struggling to understand rules governing the disclosure of information to a customer before a trade is concluded.
The rules, effective January 1, 2013, require a dealer to disclose a swap’s material risks, its economic characteristics and any conflicts of interest on its part. The CFTC has issued no regulatory guidance on the issue, nor has any industry consensus been reached. The need for certainty is especially urgent because dealers will be barred from trading via platforms that do not provide the appropriate disclosures.
A major point of contention is the so-called mid-market mark, which is defined as the midpoint of the bid and offer, minus the amount added on for profit, counterparty risk, hedging costs, funding and liquidity. The mid-market mark may be especially difficult to pinpoint for longer-dated swaps, which may have few or no quotes to work with.
Uncertainty extends to other pre-trade disclosures, such as the material risks, economic characteristics and conflicts of interest. An industry group is said to be working on standards for each.