TeraExchange, a CFTC-registered swap execution facility (SEF), will provide interdealer brokers in Europe and Asia with SEF trading and reporting services that are compliant with US regulations.
The agreements were forged with mid-tier IDBs who must comply with the CFTC rule stipulating that any trade with a US person has to be conducted on a SEF or exchange. The agreement will allow over 100 banks and international bank affiliates— that trade through the IDBs — to conduct their swap executions while adhering to US regulations requiring SEF trading and reporting.
“The clients, in this case, are U.S. banks and bank affiliates around the globe that need to ensure that these entities they are executing their trade on have the highest level of compliance possible,” said Christian Martin, CEO of TeraExchange in an interview.
This CFTC rule impacts nearly every global US trading institution — including European banks with US affiliates or US banks through their European affiliates — who routinely use European and Asian IDBs in addition to US IDBs, to carry out a portion of their trades, according to TeraExchange. Martin said the TeraExchange offering was “client driven” and reflects a “strict interpretation of the CFTC rules” by banks making sure they are compliant with it. In addition, it shows that banks that are clients of these IDBs “are not trying to navigate around those rules but instead, to avoid future headline are deciding to opt for a higher level of compliance.”
While large IDBs like ICAP, Tullett Prebon or GFI Group already have SEFs, “not every IDB became a SEF, and for those that didn’t we can extend our utility for them to give their banks the same comfort that they had trading on any other SEFs,” said Martin.
The agreements are aimed at non-SEF IDBs outside of the ones that have developed their own SEFs, he said. Otherwise, these IDBs would need to strike out on their own to launch their own SEFs. These IDBs would not want execute through a competitor’s platform.
Initially, TeraExchange is working with OTCex and RP Martin, two of Europe’s most diverse and most active IDBs, according to the release. “We will be providing solutions in Europe starting in the next few weeks,” said Martin, who added that his SEF is talking to about a dozen other IDBs. Beyond this first group, there are IDBs in Asia and South America that need solutions as well. “Our scalability and the way we constructed our business is perfect for this opportunity,” said Martin.
The move to bring on the IDBs is also a way to add liquidity to the SEF at a critical time since SEF trading is about to become mandatory after Feb. 16. “It brings us instant liquidity as well as an instant global footprint,” said Martin. In terms of market share, “If those mid-tier IDBs were pooled altogether, they would represent “double digits of global swap trading,” said Martin.
One of the features that distinguishes Tera from other competitors is that it trades swaps in multiple asset classes —interest rate swaps, CDS, agricultural, energy, and equity swaps — across the board, he said. “So it’s the right fit for companies that negotiate those trades between the banks. We let them do their business as usual and then facilitate reporting and transparency as a SEF,” said Martin.