CFTC Allows SEF to Operate without Offering "Order Book"
Commentary by Steven Lofchie
In a No-Action Letter, the CFTC Division of Market Oversight allowed a Swap Execution Facility ("SEF") to operate without offering an "Order Book."
The Division said it "will not recommend that the Commission commence an enforcement action against a SEF for failure to satisfy [this] Minimum Trading Functionality Requirement in connection with Permitted Transactions."
CFTC Rule 37.3 ("Requirements and procedures for registration") defines the minimum services that an SEF must provide, including the requirement that a SEF provide an "Order Book," to enable "[a] trading system or platform in which all market participants in the trading system or platform have the ability to enter multiple bids and offers, observe or receive bids and offers entered by other market participants, and transact on such bids and offers."
The SEF requesting the relief argued that "during the several years since SEFs have been registered with the Commission, Order Books have not attracted liquidity onto SEFs, in part due to differences between the securities and futures markets and the swaps market." The SEF stated that in the twelve or so years that it has offered the Order Book, not a single trade has been executed on it. Further, the SEF argued that maintenance of the unused services was a meaningful expense and drag on its resources.
In issuing the No-Action letter, the Division concluded that "the usefulness and effectiveness of the Minimum Trading Functionality Requirement in connection with Permitted Transactions," should be reconsidered.
Commentary
The adoption of any regulation is just a hypothesis that the regulation will make the world a better place, just as the start of a new business is a hypothesis that the business will make money. Lots of businesses fail, either right away, or over time as circumstances change. Likewise, not every rule is a success. They should be re-evaluated. This rule seems to be an example of a failed hypothesis.