MFA Letter to the CFTC on Swap Execution Facilities and the Trade Execution Requirement

MFA submitted a comment letter to CFTC on its proposed rule on “Swap Execution Facilities and Trade Execution Requirement” (“SEF Proposed Rule”). MFA is concerned that the breadth of the current SEF Proposed Rule would dramatically alter the price discovery and competitive execution process on SEFs, imposing significant costs on market participants. In this letter, MFA details these concerns and updates our recommendations to offer constructive alternatives to the Commission on the following topics:

  • Trade Execution Requirement. We do not believe that all swaps currently subject to the Commission’s clearing requirement are suitable for mandatory execution on SEFs and instead recommend changes to the current MAT process, including (i) eliminating the self-certification process and providing the Commission with a more defined role, and (ii) providing more opportunity for market participants to participate in the process, such as through industry advisory committees and public comment.
  • Methods of Execution. While we support providing SEFs with greater flexibility, we believe the Commission should ensure a baseline level of pre-trade transparency and multiple-to-multiple execution on SEFs by retaining RFQ-to-3 to preserve the documented benefits of greater transparency, liquidity, and competition.
  • Impartial Access Requirements. The proposed approach would allow SEFs to establish artificial barriers designed to limit investor access and choice and undermine free market competition. We instead recommend that the Commission codify the existing impartial access guidance.
  • Pre-Execution Communications and Block Trades. We do not believe the SEF Proposed Rule fully considers the costs to clients of prohibiting pre-execution communications and removing block trade exemptions. We recommend that the Commission retain block trade exemptions to allow for an appropriate degree of execution flexibility and permit clients to continue to engage in bilateral conversations to obtain market color, particularly if the trade execution requirement is expanded in scope.
  • STP Requirements. The Commission’s proposed changes would introduce unnecessary market, operational, and credit risks for clients, disrupting current trading practices on SEFs. We instead recommend that the Commission codify existing guidance and no-action relief setting forth the current straight-through-processing (“STP”) standards.