Streetwise Professor Craig Pirrong on the Lack of Enthusiasm toward SEFs (with Lofchie Comment)

University of Houston finance professor Craig Pirrong discussed the "CFTC's frustration at the failure of SEFs to get traction" in his blog post titled "SEFs: The Damn Dogs Won't Eat It!"

According to Professor Pirrong, Swap Execution Facilities (SEFs) are the "solution in search of a non-existent problem."Professor Pirrong explained that, in crafting SEFs, regulators took a narrow, one-size-fits-all approach by assuming that centralized order-driven markets were the best way to execute all transactions. In doing so, Professor Pirrong stated, regulators focused on pre-trade and post-trade transparency even as they "totally overlooked the importance of counterparty transparency."

Every financial market, according to Professor Pirrong, has a diversity of trade mechanisms, since various types of trades and traders are more efficiently suited for different levels of transparency and disclosure. Dodd-Frank, or "Frankendodd," as Professor Pirrong calls it, created SEFs in an attempt to establish "a monoculture and impose a standardized market structure for all participants."

Lofchie Comment: The notion that increasing SEF volumes indicates that use of SEFs is being welcomed is odd in terms of transactions in which SEF use is mandated. It's a bit like claiming that people enjoy paying taxes simply because they do pay their taxes. Given the alternative, obviously, many swaps parties would prefer not to use SEFs.

See: "SEFs: The Damn Dogs Won't Eat It!" by Craig Pirrong, Streetwise Professor.