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A number of SEF providers have sought to accommodate pre-negotiation of bilateral swaps transactions off of their SEF platforms, where the transactions are then brought to the SEF for completion (execution) on the SEF.

The recent move by a newer SEF to allow such bilateral pre-negotiation of transactions is, in our opinion, prompted by limited liquidity on the SEF’s electronic platform due to low counterparty engagement. Marketing swap transactions completed on SEF following pre-negotiation as “platform volume” may create the inaccurate impression that the SEF’s electronic platform is gaining viability. We at Mobius feel this is disingenuous, not driving market transparency and conflicted.

Additionally, the limited engagement of counterparties on the platform to date creates potentially damaging price reaction for those who do enter into transactions on the SEF’s electronic platform due to reduced liquidity providers in historically volatile markets.

Further of note, while the SEF has obligations to report the swap transactions to a swap data repository under the CFTC’s reporting rules, each counterparty retains their regulatory liability and associated penalties of non-compliance. This may be why some counterparties are being offered the ability to negotiate bilaterally, enter the transactions then handle their own reporting. These latest actions give pause to the efficacy of the whole process in Mobius’ opinion.

How does this impact Mobius/our work with clients?

 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.

What Mobius does not do is place hedge transactions on a SEF so that the SEF provider can profit from each transaction.

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) 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