The swaps industry is preparing for a major overhaul with swap execution facilities, the new Dodd-Frank mandated swap trading platforms, expected to “go-live” October 2.
But for the energy industry, the impact of “futurization” has left the Commodity Futures Trading Commission’s cornerstone regulation a non-factor.
As the date approaches, more than a dozen firms, including energy trading exchanges CME Group and IntercontinentalExchange, have registered with the CFTC to provide swap trading through SEFs. However, they are almost exclusively focusing on credit and interest rate swap offerings.
For energy traders who had traditionally relied heavily on swaps to trade crude oil, electricity and natural gas for decades, this overhaul would have been a monster story requiring companies to adjust internal systems, and find new avenues to execute energy swaps offered by dozens of competing companies offering SEFs.
Yet, with a simple flip of the switch by CME and ICE last October to change their energy swaps offerings to listed futures products, the SEF platforms were left to offer credit-default swap and interest rate swap contracts while almost completely ignoring physical commodities entirely.
The switch, since given the term the “futurization” of energy trading, dramatically shifted way the industry participates in the market and will be seen as a truly landmark decision by both the CME and ICE.
With nearly all energy contracts now trading as futures, the fact that CME Group and ICE filed with the Commodity Futures Trading Commission to operate the SEF platforms means little more than flexibility for the exchanges to offer interest rate and credit swaps products in the future.
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When the exchanges shifted all their handling of swaps into futures, they essentially turned everything into what has been referred to as a “plain vanilla swap” into a futures contract. That means that any bilateral conditions negotiated by the counterparties were no longer permitted. Instead, the terms of the transaction were set by the exchange, be it CME or ICE. Whatever deals got done that previously were swaps were now exchange-listed futures and under the exchange’s parameters.
Since one of Dodd-Frank’s goals was the exchange clearing of all swaps, turning them into futures essentially accomplished that goal, since the deals were cleared under the exchanges’ normal clearing activities. The move also gave market participants the regulatory certainty of futures trading while the rules regarding swaps were still being sorted out by the CFTC.
ICE in particular is almost exclusively focusing its SEF platform on interest rate products while CME is expected to offer few commodities-linked swaps products. According to a source at the exchange, they have no expectations of moving away from the futures structure for the energy complex.
So going forward, the prevailing market structure suggests that commodities will trade as futures on the exchanges through a central limit-order book, while interest rate and credit products will trade as swaps on a SEF.
That being said, those who still execute energy swaps or exchange-for swaps trades on CME Group’s ClearPort will operate under the status quo, with a SEF designation for the exchange meaning little more than regulatory paperwork.