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We’ve received inquiries asking if swap execution facilities (“SEFs”) can charge fees. Like any business, a SEF is free to charge fees for the services it provides. It is common for SEFs (as it is for exchanges) to charge fees to generate revenues to cover their operating costs[1] and seek to earn profits. As a general matter, a SEF is required by the CFTC to have comparable fee structures for participants receiving comparable access to the SEF or comparable services from the SEF. Subject to this general standard, SEFs have discretion to decide on the types and amounts of fees they charge.

SEF fees are an important factor to consider (among others) when evaluating the advantages and disadvantages of executing a swap transaction on a SEF or bilaterally away from any SEF. We have seen one new SEF with a current pricing model that imposes fees only on the dealer side, in the forms of monthly platform user fees, and per trade (transaction) fees that vary depending on the notional size of a transaction.[2] We expect those fees will get priced by the dealer side into the transaction prices that other counterparties negotiate over the SEF with them. 

If a SEF has an affiliate that provides professional CTA services to clients with respect to swaps, it seems fair to consider whether the affiliation creates a conflict of interest for the CTA to favor executing a client’s swap transaction on the affiliated SEF in lieu of executing the transaction on another available SEF or negotiating the transaction away from any SEF through other permissible means.

It is very much the opinion of Mobius that the process of transaction support that may (if appropriate and meeting client bespoke capital objectives) 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.

[1] A SEF is generally required by the CFTC to have financial resources that exceed the total amount that the SEF needs to cover its operating costs for a one-year period, calculated on a rolling basis.

[2] The SEF’s fee schedule also sets out a transaction fee that a dealer would pay for a transaction executed away from the SEF, and which is higher than the on-SEF transaction fee.  We are unclear on the basis for charging such a fee but presumably that would be linked to bringing the transaction to the SEF for confirmation or post-trade processing.