SEF 101

SEF Update: Recent CFTC announcement

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What happened?

CTFC ordered ARM to pay $200k for failing to register as a SEF (View CFTC announcement)

The order alleges that from about September 2017 to the present, ARM, a registered CTA, operated a trading system or platform in a manner that required the firm to be registered as a swap execution facility (SEF). The order states that ARM often recommended that clients execute swap transactions based on natural gas, natural gas liquids, or crude oil, and that following a client’s request for swap pricing ARM would submit pricing requests to potential counterparties, certain times to multiple potential counterparties with which the client had ISDA agreements, and other times to a specific potential counterparty identified by the client.

According to the order, after receiving proposed prices, ARM, if authorized by the client, would approve, or reject a price based on the client’s pre-approved threshold, including by communicating “done” via chat or email, to execute the swap transaction, and ARM would also confirm the swap execution with the client. Where ARM did not have authority to execute the swap, it would typically participate in the client’s phone call with the relevant counterparty during which the client would agree to terms.

Based on our reading of the order, the CFTC’s finding that ARM violated SEF registration requirements is predicated on the fact that there were times ARM requested swap pricing from multiple potential counterparties when assisting clients in executing their swap transactions. The order cites the CFTC Staff Advisory issued last year on SEF registration requirements to support its finding.

How does this impact Mobius/our work with clients?

The order does not impact Mobius. At Mobius, we believe in market transparency and helping our clients evaluate their different hedging tools to meet their unique business needs. Mobius continues to provide bespoke market analysis and non-conflicted transaction support based on our clients’ unique capital objectives.

Like we have said previously, it is very much the opinion of Mobius that the process of transaction support that may (if appropriate and meeting client bespoke capital objectives)5847 San Felipe Street, Suite 4200, Houston, Texas 77057 713.877.0404 MobiusRiskGroup.com result in a hedge transaction is very much unique to each client’s needs, market conditions, and the role and abilities of their banking and hedging counterparties.

What is a SEF?

As we’ve noted before, a SEF is a relatively new type of regulated organized market, added to the Commodity Exchange Act in 2010. The statutory definition covers a trading system, platform or facility on which “multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility.”

Does Mobius need to register as a SEF?

Based on our careful analysis, we believe the answer is no. Mobius provides permissible bilateral transaction execution support to CTA clients to implement the bespoke recommendations made based on a client’s unique capital restraints and goals.

As a matter of practice, Mobius develops its own views on appropriate price levels for transacting by applying our market analytics to available sources of market data. We engage with a single potential counterparty at a time to solicit and negotiate pricing terms for a client’s swap transaction, and if trade terms cannot be agreed, only then do we move on to engage with another potential counterparty.

Does Mobius want to be a SEF?

No. We believe we provide quality, cost effective services to our clients, and we do not see any benefit to our clients if we were to register and operate as a SEF. We also do not see any demand or interest from our clients in having their swap transactions executed on a SEF. We recognize there may be appropriate circumstances for using a SEF, but there are also factors that may make executing on a SEF unattractive to a client, such as cost structure, the contractual terms to access the SEF, or the lack of participation of the client’s preferred trading counterparties.

Contact Us

Should you require additional information or have inquiries please contact: Casey Ragsdale, President, cragsdale@mobiusriskgroup.com Paul Smith, Chief Risk Officer, psmith@mobiusriskgroup.com Phil Thompson, Vice President and Co-Head, Commodities Risk, pthompson@mobiusriskgroup.com