Swap execution facility

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A swap execution facility (an SEF) is defined in the Dodd-Frank legislation as a “facility, trading system or platform 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 facility or system, through any means of interstate commerce”.

SEFs are one of two types of "exchange" on which mandatory cleared swaps may be traded. The other type comprises designated contract markets (DCMs).

SEFs provide post-trade transparency by real-time public reporting and pre-trade transparency by providing bids and offers to eligible contract participants (ECPs) - broadly financial institutions or individuals or legal entities with a minimum USD 10 m. of net worth. (Non ECPs can only deal with DCMs.)

The intention of the legislation is to move what were bilateral derivative contracts on to the two types of exchange that enable participants to execute or to trade swaps with other market participants - so called "many to many" functionality.

This functionality is required to be offered for mandatory cleared swaps by each SEF through an order book or a request for quote (RFQ) system for mandatory cleared swaps. RFQ systems must eventually show the RFQ to at least three market participants. Provided order book trading is offered at a minimum, other swaps can use any trading system for execution.

An SEF may facilitate trade in any swap product.

If the product has been the subject of a Commodity Futures Trading Commission (CFTC) determination that it must be cleared, then the SEF will file with the CFTC a "made available to trade" (MAT) determination. After CFTC approval of the MAT determination in such a case, bilateral execution of such swaps is no longer permitted: they must be executed on an SEF or a DCM. SEFs, then, offer such swaps as "Required Transactions" - its other swap offerings being "Permitted Transactions".


'Block trades' - those large enough to cause market disruption, the size being defined variously for each swap type by the CFTC - are not required to be traded as Required Transactions on SEFs and have delayed real-time public reporting.

See also

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