Swap Execution Facilities (SEFs)
Swap Execution Facilities (SEFs)
Swap Execution Facilities (SEFs) are CFTC-regulated trading platforms for over-the-counter derivatives. Created by the Dodd-Frank Act to increase transparency and competition, SEFs require certain standardized swaps to be executed on-platform rather than through bilateral negotiation.
Definition and Key Concepts
What Is a SEF?
A SEF is a trading system or platform that:
- Allows multiple participants to trade swaps
- Provides pre-trade price transparency
- Offers multiple means of execution
- Is registered with and regulated by the CFTC
Regulatory basis: Dodd-Frank Act Section 733, codified in CFTC Regulation Part 37
SEF Landscape
Major SEFs by asset class:
| Asset Class | Notable SEFs |
|---|---|
| Interest rates | Tradeweb, Bloomberg, ICAP, BGC |
| Credit | Bloomberg, Tradeweb, MarketAxess |
| FX | Reuters, 360T, Bloomberg |
| Commodities | ICE, Tradition, BGC |
Made Available to Trade (MAT)
The CFTC designates certain swaps as "Made Available to Trade," requiring execution on SEF or DCM:
Current MAT swaps (US):
- Fixed-for-floating interest rate swaps (USD, EUR, GBP)
- Standard CDS indices (CDX, iTraxx)
- Forward rate agreements
Non-MAT swaps: May be executed on SEF voluntarily or off-SEF bilaterally.
How It Works in Practice
Execution Methods
SEFs must offer at least one of these methods:
| Method | Description | Use Case |
|---|---|---|
| Request for Quote (RFQ) | Request prices from 2-3 dealers | Most common |
| Central Limit Order Book (CLOB) | Anonymous matching | Liquid, standardized products |
| Voice execution | Broker-assisted with SEF confirmation | Complex trades |
RFQ process:
- Client submits RFQ to 2+ dealers
- Dealers respond with streaming or indicative quotes
- Client selects best quote
- Trade confirmed on SEF
- Trade reported to SDR
Order Book vs. RFQ
| Feature | CLOB | RFQ |
|---|---|---|
| Anonymity | Pre-trade anonymous | Identity disclosed |
| Price discovery | Continuous | On-demand |
| Liquidity | Visible depth | Dealer-provided |
| Best execution | Clear best bid/offer | Compare quotes |
| Typical users | Dealers, electronic traders | Buy-side, corporates |
Trade Workflow
Standard SEF execution flow:
| Step | Timing | Activity |
|---|---|---|
| 1 | T+0, 10:00 | Client logs into SEF platform |
| 2 | T+0, 10:01 | Client enters RFQ for 5Y USD IRS |
| 3 | T+0, 10:02 | 3 dealers receive and respond |
| 4 | T+0, 10:03 | Client selects best price |
| 5 | T+0, 10:03 | Trade executed, confirmation generated |
| 6 | T+0, 10:04 | Real-time trade reported to SDR |
| 7 | T+0, 10:05 | Trade submitted to CCP for clearing |
| 8 | T+0, EOD | Clearing confirmed |
Worked Example
Trade details:
- Product: 5-year USD fixed-for-floating IRS
- Notional: $50 million
- Client: Receives fixed
- Execution method: RFQ
RFQ responses:
| Dealer | Fixed Rate (Receive) | Spread to Mid |
|---|---|---|
| Dealer A | 4.485% | +0.5 bps |
| Dealer B | 4.490% | +1.0 bps |
| Dealer C | 4.480% | 0.0 bps |
Best execution: Client selects Dealer C at 4.480% (highest rate for receiver).
Spread analysis:
- Mid-market: 4.480%
- Dealer A: 0.5 bps worse
- Dealer B: 1.0 bps worse
- Dealer C: At mid
Cost of execution: If client had traded with Dealer B: Cost = $50,000,000 × 0.01% × 4.5 years (duration) = $22,500
Executing at mid vs. Dealer B saved approximately $22,500.
Block Trade Exception
For large trades, block trade rules apply:
| Asset Class | Minimum Block Size |
|---|---|
| IRS (USD, 5Y) | $85 million notional |
| IRS (EUR, 5Y) | €65 million notional |
| CDS Index | $100 million notional |
Block trade features:
- 15-minute delay before public reporting
- May execute off-platform (voice with SEF confirmation)
- Must still be reported to SDR
Risks, Limitations, and Tradeoffs
Pre-Trade Transparency
SEFs provide price transparency but with tradeoffs:
| Benefit | Cost |
|---|---|
| Better price discovery | Information leakage for large orders |
| Competition among dealers | Wider spreads for non-standard products |
| Audit trail | Operational complexity |
Execution Quality Considerations
| Factor | Impact |
|---|---|
| Number of dealers in RFQ | More = better competition |
| Trade size | Larger = wider spreads |
| Product standardization | Standard = tighter spreads |
| Time of day | NY/London overlap = best liquidity |
| Market conditions | Volatility = wider spreads |
Technology Risk
| Risk | Description | Mitigation |
|---|---|---|
| Platform outage | SEF unavailable | Maintain multiple SEF connections |
| Connectivity failure | Network issues | Redundant connections |
| Order errors | Fat-finger mistakes | Pre-trade risk controls |
| Latency | Slow quote response | Direct connections to SEFs |
Regulatory Compliance Risks
| Requirement | Risk of Non-Compliance |
|---|---|
| MAT execution | Trades executed off-SEF may be invalid |
| RFQ to 2+ dealers | Single-dealer RFQ violates rules |
| Trade reporting | Late or missed reports = fines |
| Record keeping | Failure to retain records = penalties |
Common Pitfalls
| Pitfall | Description | Prevention |
|---|---|---|
| Insufficient RFQ recipients | Fewer than required dealers | Configure systems for minimum recipients |
| Late reporting | Trade reported after deadline | Automate real-time reporting |
| Incorrect product classification | MAT trade executed off-SEF | Maintain product classification database |
| Block threshold errors | Incorrect block size application | Verify thresholds before execution |
SEF vs. OTF (European Comparison)
| Feature | SEF (US) | OTF (EU) |
|---|---|---|
| Regulator | CFTC | ESMA/NCAs |
| Products | Swaps | Derivatives, bonds, emissions |
| Mandatory execution | MAT swaps | Derivatives subject to trading obligation |
| Trading methods | RFQ, CLOB, voice | RFQ, CLOB, voice, hybrid |
| Pre-trade transparency | Required | Required |
| Post-trade reporting | To SDR | To ARM/APA |
Best Execution Considerations
Factors in evaluating execution quality:
| Factor | How to Measure |
|---|---|
| Price | Deviation from mid-market |
| Speed | Time from RFQ to execution |
| Likelihood of execution | Fill rate on quotes |
| Size | Ability to execute full notional |
| Cost | All-in execution cost including fees |
Execution analysis: Institutional investors should track execution quality across SEFs and dealers to optimize execution over time.
Checklist and Next Steps
SEF onboarding checklist:
- Complete SEF membership application
- Execute SEF rulebook acknowledgment
- Establish connectivity (API or GUI)
- Configure user permissions and limits
- Set up pre-trade risk controls
- Link to clearing broker (FCM)
- Test execution workflow
- Verify trade reporting setup
Execution checklist:
- Verify product is MAT or non-MAT
- Select appropriate execution method
- Ensure minimum RFQ recipients (if required)
- Confirm block threshold for large trades
- Review quotes and select best price
- Verify confirmation details
- Confirm SDR reporting
Related articles:
- For margin requirements, see Initial Margin vs. Variation Margin in OTC Trades
- For clearing structures, see Cleared vs. Bilateral Swap Structures